Small Business Lending Under the Equal Credit Opportunity Act (Regulation B)

AGENCY:

Consumer Financial Protection Bureau.

ACTION:

Final rule.

SUMMARY:

The Consumer Financial Protection Bureau (CFPB or Bureau) is 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, covered financial institutions are 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. The final rule also addresses the CFPB's approach to privacy interests and the publication of data; shielding certain demographic data from underwriters and other persons; recordkeeping requirements; enforcement provisions; and the rule's effective and compliance dates.

DATES:

Effective date: This final rule is effective August 29, 2023.

Compliance dates: Covered financial institutions must comply with the final rule beginning October 1, 2024, April 1, 2025, or January 1, 2026, as set forth in § 1002.114(b).

FOR FURTHER INFORMATION CONTACT:

Camille Gray, Paralegal Specialist; Kris Andreassen, Pavitra Bacon, Joseph Devlin, Amy Durant, Angela Fox, Caroline Hong, David Jacobs, Kathryn Lazarev, Lawrence Lee, Adam Mayle, Kristen Phinnessee, or Melissa Stegman, 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 Final Rule

In 2010, Congress passed the Dodd-Frank Act. Section 1071 of that Act amended ECOA to require that financial institutions collect and report to the CFPB 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) 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 CFPB to require any additional data that it 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 data; recordkeeping; publication of small business lending data; and modifications or deletions of data prior to publication in order to advance a privacy interest.

Section 1071 directs the CFPB 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 it to adopt exceptions to any requirement or to exempt financial institutions from the requirements of section 1071 as it deems necessary or appropriate to carry out the purposes of section 1071. The CFPB is adding a new subpart B to Regulation B to implement the requirements of section 1071. Key aspects of the CFPB's final rule are summarized below.

As envisioned by Congress, the small business lending rule will create our nation's first consistent and comprehensive database regarding lending to small businesses, including small farms. This will fulfill section 1071's statutory purposes by allowing Federal, State, and local enforcement agencies to assess potential areas for fair lending enforcement and by enabling 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. The database, again as dictated by Congress, will not reveal privacy-protected information about any particular small business applicant, and small businesses will retain control over how much of their demographic information they choose to divulge. In addition, the CFPB believes that its final rule will help to sharpen competition in credit supply by creating greater transparency around small business lending.

Scope. The CFPB is requiring financial institutions to collect and report data regarding applications for credit for small businesses, including those that are owned by women and minorities. The CFPB is not requiring financial institutions to collect and report data regarding applications for women-owned and minority-owned businesses that are not small. Because more than 99 percent of women-owned and minority-owned businesses are small businesses, covering small businesses necessarily means nearly all women-owned and minority-owned businesses will also be covered. The CFPB 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, a “financial institution” is defined to include any partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative organization, or other entity that engages in any financial activity. The rule thus applies 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, community development financial institutions (both depository and nondepository institutions), Farm Credit System lenders, 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 rule uses the term “covered financial institution” to refer to those financial institutions that are required to comply with its data collection and reporting requirements. A covered financial institution is defined as a financial institution that originated at least 100 covered credit transactions (rather than 25, as proposed) for small businesses in each of the two preceding calendar years. The CFPB is not adopting an asset-based exemption threshold for depository institutions, or any other general exemptions for particular categories of financial institutions.

The final rule also permits creditors that are not covered financial institutions to voluntarily collect and report small business lending data in certain circumstances.

Covered credit transactions. Covered financial institutions are required to collect and report data regarding covered applications from small businesses for covered credit transactions. A “covered credit transaction” is one that meets the definition of business credit under existing Regulation B, with certain exceptions. Transactions within the scope of the rule include loans, lines of credit, credit cards, merchant cash advances, and credit products used for agricultural purposes. The CFPB is excluding trade credit, public utilities credit, securities credit, and incidental credit as proposed. In addition, the CFPB has added exclusions for transactions that are reportable under the Home Mortgage Disclosure Act of 1975 (HMDA) and insurance premium financing. Consistent with the CFPB's proposal, factoring, leases, and consumer-designated credit that is used for business or agricultural purposes are also not covered credit transactions. In addition, the CFPB has made clear that purchases of originated covered credit transactions are not reportable.

Covered applications. A “covered application”—which triggers data collection, reporting, and related requirements when submitted by a small business—is defined 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 definition of covered application is largely consistent with the existing Regulation B definition of that term. However, certain circumstances are not covered applications for purposes of this rule, even if they are considered applications under existing Regulation B. Specifically, covered applications for purposes of this rule do not include (1) reevaluation, extension, or renewal requests on existing business credit accounts, unless the request seeks additional credit amounts; or (2) inquiries and prequalification requests.

Small business definition. A covered financial institution is required to collect and report data on a covered application from a “small business,” which the rule defines in accordance with the meaning of “business concern or concern” and “small business concern” under the Small Business Act and Small Business Administration (SBA) regulations. However, in lieu of using the SBA's size standards for defining a small business concern, the definition in this final rule looks to whether the business had $5 million or less in gross annual revenue for its preceding fiscal year. The CFPB believes that a straightforward $5 million threshold strikes the right balance in terms of broadly covering the small business credit market to fulfill section 1071's statutory purposes while meeting the SBA's criteria for an alternative size standard. The final rule also anticipates updates to this size standard, not more than every five years, to account for inflation. The SBA Administrator has approved the CFPB's use of this alternative size standard pursuant to the Small Business Act.

Data to be collected and reported. The rule addresses the data points that must be collected and reported by covered financial institutions for covered applications from small businesses. Congress specifically enumerated many of these data points in ECOA section 704B(e)(2); for the others, the Congress granted the CFPB express authority in 704B(e)(2)(H) to require financial institutions to compile and maintain, along with enumerated data points, a record of “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; other data points are based on information within the financial institution's control. Covered financial institutions must not discourage an applicant from responding to requests for applicant-provided data and must otherwise maintain procedures to collect such data at a time and in a manner that are reasonably designed to obtain a response; when collecting data directly from the applicant, the rule identifies certain minimum provisions that must be included within financial institutions' procedures in order for them to be considered “reasonably designed.” The rule also addresses what financial institutions should do if, despite having such procedures in place, they are unable to obtain certain data from an applicant. Furthermore, the rule makes clear that a financial institution may rely on information from the applicant, or appropriate third-party sources, when compiling data. If the financial institution verifies particular information, however, it must report that verified information. Financial institutions are permitted to reuse previously collected data in certain circumstances, rather than having to request it from the applicant for each covered application.

As noted above, the rule includes 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: census tract based on an address or location provided by the applicant; gross annual revenue for the applicant's preceding full fiscal year; the 3-digit North American Industry Classification System (NAICS) code for the applicant; the number of workers that the applicant has; the applicant's time in business; and the number of principal owners the applicant has.

There are also applicant-provided data points on the demographics of the applicant's ownership: first, whether the applicant is a minority-owned business or a women-owned business, along with a new data field capturing whether the applicant is an LGBTQI+-owned business; and second, the ethnicity, race, and sex of the applicant's principal owners. The CFPB refers to these data points collectively as an applicant's “protected demographic information.” Principal owners' ethnicity and race will be collected from applicants using aggregate categories as well as disaggregated subcategories. Principal owners' sex/gender will be collected from applicants without using pre-defined response categories.

The CFPB is not finalizing its proposed requirement to have financial institutions collect race and ethnicity via visual observation or surname if an in-person applicant does not provide any ethnicity, race, or sex information for any principal owners; instead, the final rule requires that these data be reported based only on information provided by the applicant.

The CFPB is providing lenders with a sample data collection form, in both digital and paper form, to assist them in collecting protected demographic data from applicants. Although the contents of the sample form reflect certain legal requirements that financial institutions must follow, their use of the sample form is not itself required under the final rule. Rather, it is an available resource to financial institutions.

In addition, the rule includes data points that will 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 (that is, the means by which the applicant submitted the 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 includes, 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 CFPB's rule implements a requirement in section 1071 that certain data collected from applicants be shielded from underwriters and certain other persons (or, if a firewall is not feasible, a notice is given instead); the CFPB refers to this as the “firewall.”

Generally, an employee or officer of a financial institution or a financial institution's affiliate that is involved in making any determination concerning a covered application is prohibited from accessing the applicant's responses to the inquiries about protected demographic information that the financial institution makes pursuant to the rule. This prohibition does not apply to an employee or officer, however, if the financial institution determines that employee or officer should have access to an applicant's responses to its inquiries regarding the applicant's protected demographic information and the financial institution provides a notice to the applicant regarding that access. 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. The final rule does not require specific language for this notice but does provide sample language that a covered financial institution may use. The final rule also clarifies several key points of the firewall provision.

Reporting data to the CFPB; publication of data by the CFPB and other disclosures; and privacy considerations. Financial institutions must collect small business lending data on a calendar year basis and report it to the CFPB on or before June 1 of the following year. Financial institutions reporting data to the CFPB are required to provide certain identifying information about themselves as part of their submission. The CFPB is releasing, concurrently with this final rule, technical instructions for the submission of small business lending data in a Filing Instructions Guide.

The CFPB will make available to the public, on an annual basis, the application-level data submitted to it by financial institutions, subject to modifications or deletions made by the CFPB, to advance privacy interests. To ease burden on covered entities, CFPB publication of application-level data will satisfy financial institutions' statutory obligation to make data available to the public upon request. At this time, the CFPB is not making a final decision on the best way to protect privacy interests through pre-publication modification and deletion of reported data. Assessing the many comments it received in this area, the CFPB is preliminarily of the view that its privacy assessment will focus primarily on whether (and, if so, how) small business lending data, individually or in combination with other data, pose re-identification risk for small businesses and, as a result, for their owners. The CFPB also anticipates taking account of compelling risks to financial institution privacy interests. The CFPB does not anticipate that it can carry out the necessary analysis of pre-publication modifications and deletions without at least one full year of application-level data. The CFPB intends to further engage with stakeholders on the issue of data publication before it resolves on a particular approach to protecting privacy interests through modifications and deletions. Finally, the CFPB anticipates publishing select aggregate data— i.e., data that does not include application-level information—before it publishes application-level data.

In addition, the final rule prohibits a financial institution or third party from disclosing protected demographic information, except in limited circumstances. Specifically, the final rule prohibits financial institutions from disclosing or providing to third parties the protected demographic information collected pursuant to the rule, except to further compliance with ECOA or Regulation B or as required by law. The final rule also limits third parties' disclosure of protected demographic information.

Recordkeeping, enforcement, and severability. The rule addresses issues related to recordkeeping, enforcement of violations, and severability. The CFPB is also finalizing provisions regarding treatment of bona fide errors under the rule in general along with several safe harbors for particular kinds of errors. Relatedly, as explained in part VII below, covered financial institutions will also have a 12-month grace period during which the CFPB—for institutions under its jurisdiction—will not assess penalties for errors in data reporting, and will conduct examinations only to assist institutions in diagnosing compliance weaknesses, to the extent that these institutions engaged in good faith compliance efforts.

Effective and compliance dates, transitional provisions. This final rule will become effective 90 days after publication in the Federal Register . The CFPB is adopting a tiered compliance date schedule because it believes that smaller and mid-sized lenders would have particular difficulties complying within the single 18-month compliance period proposed in the NPRM. Compliance with the rule beginning October 1, 2024 is required for financial institutions that originate the most covered credit transactions for small businesses. However, institutions with a moderate transaction volume have until April 1, 2025 to begin complying with the rule, and those with the lowest volume have until January 1, 2026. Covered financial institutions may begin collecting applicants' protected demographic information one year prior to their compliance date to help prepare for coming into compliance with this final rule. The CFPB is also adopting a new provision to permit financial institutions that do not have ready access to sufficient information to determine their compliance tier (or whether they are covered by the rule at all) to use reasonable methods to estimate their volume of originations to small businesses for this purpose.

Compliance and technical assistance. The CFPB is supporting small business lenders with a variety of compliance and technical tools to help them determine if they are covered by this new rule, and if so when their obligations arise. For lenders that are covered, the agency is also making available a range of resources to assist with effective implementation of the rule, including a small entity compliance guide. These materials are available at https://www.consumerfinance.gov/compliance/compliance-resources/small-business-lending-resources/small-business-lending-collection-and-reporting-requirements. The CFPB is also launching a dedicated regulatory and technical support program that can provide oral and written assistance in response to stakeholder questions about collection and reporting obligations, and a range of technical resources to make it easier to report data to the CFPB. The support program and related materials are available at https://www.consumerfinance.gov/data-research/small-business-lending-data/ . To further assist covered financial institutions that serve small business customers in their preferred languages, the CFPB will make the sample data collection form available in several languages. The CFPB is also planning to develop resources to help small businesses understand how their data are treated, the availability of the dataset, and the broader purposes of the rule.

Use of technology partners and industry consortia for accurate, cost-efficient data collection and reporting. The final rule broadly permits financial institutions to work with third parties, including industry consortia, to develop services and technologies to aid in collecting and reporting data. So long as they meet the obligations stated in the rule, including collecting data in a manner that does not discourage small businesses from providing it, financial institutions are free to work with third parties to assist them with their compliance obligations, whether that is with respect to data collection, maintenance or reporting. The CFPB plans to work with consortia or other entities seeking to assist financial institutions to deploy industry-identified solutions. For example, the CFPB plans to provide Application Programming Interfaces in an open-source environment to assist financial institutions' technology partners to develop accurate and efficient data reporting tools.

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 CFPB 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), and the Community Development Financial Institutions (CDFI) Fund.

The collection and subsequent publication of more robust and granular data regarding credit applications for small businesses will provide much-needed transparency to the small business lending market. The COVID–19 pandemic has shown that transparency is essential, particularly at a time of crisis, when small businesses are in urgent need of credit to recover from economic shocks.

In addition to informing policymaking, data collected under the final rule can help creditors identify potentially profitable opportunities to extend credit. As a result, small business owners stand to benefit from increased credit availability. More transparency will also allow small business owners to more easily compare credit terms and evaluate credit alternatives, helping them to find the credit product that best suits their needs at the best price. In these different ways, the data will help stakeholders to enhance business and community development, boosting broad-based economic activity and growth. 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 otherwise facilitating the enforcement of anti-discrimination laws.

Overview

Small businesses are a cornerstone of the U.S. economy. There were over 33 million small businesses in the U.S. in 2019, employing almost half of all private sector employees. Small businesses, particularly start-ups, also generated 62 percent of new jobs since 1995. 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. Between 2007 and 2009, employment at businesses with under 50 employees fell by 10.4 percent, compared with 7.5 percent at larger firms, while between 2008 and 2011, lending to small firms fell by 18 percent, compared with 9 percent for all firms. Small businesses suffered again because of the COVID–19 pandemic. Around 40 percent of small businesses were at least temporarily closed in late March and early April 2020, due primarily to demand shocks and employee health concerns. Across the first year of the pandemic, some 200,000 more businesses exited the market relative to historic levels. It took until July 2021 for non-farm private sector jobs at establishments with fewer than 50 employees to recover to pre-pandemic levels. As of mid-2022, small business loan approvals (other than for government emergency programs) still remained below pre-pandemic levels.

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 4,800 as of June 30, 2022 and the number of branches declined by 14 percent from 2009 to 2020. Meanwhile, new providers and products, such as online lenders and merchant cash advances, have become increasingly prevalent in the small business lending market. Financing by merchant cash advance providers is estimated to have increased from $8.6 billion in volume in 2014 to $15.3 billion in 2017. From 2017 to 2019, the volume may have increased further to $19 billion. Meanwhile, financing provided by online “fintech” lenders is estimated to have increased from $1.4 billion in outstanding balances in 2013 to approximately $25 billion in 2019.

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 those that are already underserved, to access credit and remain open—especially 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 than traditional providers. Differences in funding models may also make non-traditional credit providers less resilient than depository banks or credit unions during shocks to the financial system such as the onset of the COVID–19 pandemic. Additionally, they may use complex algorithms and artificial intelligence, which may create or heighten “risks of unlawful discrimination, unfair, deceptive, or abusive acts or practices . . . or privacy concerns.” Opaque product terms and high costs can also trap business owners in cycles of debt. In terms of opportunity, some newer approaches may help applicants 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 lower personal credit scores than male and white business owners —to access credit. Non-traditional credit providers as well as digital offerings by traditional financial institutions may also help offset decreases in lending associated with the closure of 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 in data reported to 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.

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. Further, these datasets almost exclusively 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 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 CFPB's rule to implement section 1071 will provide: (A) improved understanding of 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, minority-owned, and LGBTQI+-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, women, and LGBTQI+ entrepreneurs.

The Small Business Act, as implemented by the Small Business Administration (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 1,012 six-digit North American Industry Classification System (NAICS) codes. 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. Employee-based size standards range from 100 employees (used almost entirely in certain industries within the wholesale trade sector) to 1,500 employees (used in industries across a variety of sectors including, for example, petroleum refineries, automobile manufacturing, and greeting card publishers). Size standards based on average annual receipts are used in nearly all other industries, and range from $2.25 million (used in several industries in the crop production and animal production and aquaculture subsectors) to $47 million (used in industries across a variety of sectors including, for example, passenger car leasing, television broadcasting, and general medical and surgical hospitals).

Simpler definitions of what constitutes a small business are used in certain contexts. For example, in certain annual research releases the SBA Office of Advocacy defines a small business as one that has fewer than 500 employees. According to the Office of Advocacy, and based on this definition of a small business, in 2018 there were 32.5 million such businesses in the U.S. that represent 99.9 percent of all U.S. firms and employ over 60 million Americans. Over six million of these small businesses have paid employees, while 26.5 million are non-employer businesses ( i.e., the owner(s) are the only people involved in the business). From 1995 to 2020, small businesses, particularly young businesses and start-ups, created 12.7 million net new jobs in the U.S., while large businesses created 7.9 million.

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 2019, minorities owned around 1.1 million employer firms in the U.S. (amounting to 18.7 percent of all employer firms) and, as of 2018, approximately 8.7 million non-employer firms (33.6 percent of all non-employer firms). Likewise, as of 2019, women owned about 1.2 million employer firms (20.9 percent of all employer firms) and, as of 2018, approximately 10.9 million non-employer firms (41.0 percent of all non-employer firms). Additionally, in 2016 there were an estimated 1.4 million LGBTQI+ business owners in the United States.

Businesses are legally structured in several ways. In 2018, 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. 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. Six percent of non-employer businesses were structured as corporations—4.5 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. In 2018, most small employer businesses were corporations, with 52.1 percent choosing to be S-corporations and 15.3 percent preferring C-corporation status, although sole proprietorship and partnership structures remained relatively popular at 13.7 percent and 11.9 percent, respectively. By contrast, in 2017, 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.

Small businesses are particularly important in specific sectors of the economy. In 2019, in the services sector, small businesses supplied 9.2 million healthcare and social services jobs (44 percent of all healthcare and social services jobs), 8.8 million accommodation and food services jobs (61 percent), and 5.7 million construction jobs (81 percent). In the same year, in manufacturing, small businesses supplied 5.1 million manufacturing jobs (42 percent of all manufacturing jobs). Finally, in 2016, family farms with annual gross sales under $500,000 totaled over 91 percent out of 2.2 million farms, and small businesses provided over 137,000 agriculture, forestry, fishing and hunting jobs (84 percent of all agriculture, forestry, fishing and hunting jobs). 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 were especially hard-hit by the onset of the COVID–19 pandemic. At one point in the pandemic in April 2020, 20 percent of self-employed workers had temporarily exited the labor market. 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 businesses (also declining by almost 50 percent among food services and drinking establishments within the leisure and hospitality industry), in which small businesses employ over 60 percent of workers. Women-, minority-, and LGBTQI+-owned small businesses were hit particularly hard. Between February and April 2020, some 373,000 jobs were lost in child daycare services, a sector in which women-ownership predominates and minority-ownership is very significant. Only 54 percent of these jobs were recovered by the end of 2020. In 2021, 85 percent of LGBTQI+-owned small businesses reported the pandemic was having a negative effect on their business, compared to 76 percent of non-LGBTQI+-owned small businesses. Since 2022, small businesses have faced different economic shocks, including inflation and a shortage of labor, as the economy reopened and resurgent consumer demand has stretched still-fragile supply chains.

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 CFPB 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 ethnicity, race, and sex of small business owners, applications as opposed to originations, and for small business financing products that are not currently reported in Call Report data.

Data on small business lending are fragmented, incomplete, and not standardized, making it difficult to conduct meaningful comparisons across products and over time. Against this background, it is not hard to see why Congress believed that the collection of small business application data would serve to identify business and community development needs and opportunities. The lack of data 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. 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 nondepository lenders. 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.

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 Community Reinvestment Act (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). The CRA currently 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. 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. There are no similar sources of information about lending to small businesses by nondepository institutions. The SBA also releases loan-level data concerning some of its loan programs, but these typically do not include demographic information, and cover 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 market, and lack standardization across different agencies.

First, these datasets exclude entire categories of lenders. For example, banks under $1.384 billion in assets, as of 2022, do not have to report under the CRA. The FFIEC and NCUA Call Reports and CRA data do not include lending by nondepository financial institutions, which the CFPB estimates to represent 37 percent of the small business financing market and is rapidly growing.

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 ethnicity, race, and sex 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 FFIEC Call Report and CRA data separately identify loans of under $1 million in value and, among loans of under $1 million in value, CRA data also identify loans to businesses with annual revenues of $1 million or less (if the lender collects borrower revenue information). 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 on the NCUA Call Report, 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, as noted above, 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 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.

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, sample sizes, 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, small business employment, rates of small business credit application approvals, and small business lending and delinquency levels. Other databases have more granularity and provide detailed information on individual businesses, including revenue, credit utilization, industry, and location.

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 self-reporting or 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 as well as have restrictions on their use, raising equity issues for stakeholders who cannot afford access or are not permitted to use the data for their desired purposes.

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. A study by a small business trade group found a correlation between small business owners' ability to access credit and their ability to hire. 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.

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 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 households and women-led households, which on average have less wealth than white households and male-led households.

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 some entrepreneurs may not wish to do. For small businesses, equity funding also tends to be somewhat more expensive than debt financing in the long run. This is for a number of reasons, including that loan interest payments, unlike capital gains, are tax-deductible. Finally, equity investments from others besides family and friends are available to only a small fraction 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 unions, as well as online lenders and commercial finance companies, specialized providers of specific financing products, nonprofits, 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. As noted earlier, the number of banks has declined significantly since a post-Great Depression peak in 1986 of over 18,000 institutions to under 4,800 institutions as of June 30, 2022, while 13,500 branches closed from 2009 to mid-2020, representing a 14 percent decrease. 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. 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. 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, raising concerns about equal access to credit.

As banks have merged and the number of branches reduced, the share of banking assets has also become increasingly concentrated in the largest institutions, with banks of over $10 billion in assets representing 86 percent of all industry assets in 2021, totaling $20.3 trillion out of $23.7 trillion. 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. 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. Since institutions under $1.384 billion in assets currently are not required to report on lending under the CRA, it is difficult to precisely quantify the negative impact of bank consolidation and shuttered branches on small business lending and access to credit in local areas. Qualitatively, community banks typically receive high satisfaction scores among small business borrowers, reflecting their greater commitment to relationship banking, a model of banking “used to serve families, businesses, and communities as individuals, with an emphasis on providing customized help, rather than assembly line service.”

In contrast to banks, credit unions increased their small business lending from $30 billion in 2008 to $71 billion in 2021. Like community banks, credit unions typically receive high satisfaction scores among small business borrowers, reflecting more high-contact, relationship-based lending models.

Certain banks and credit unions choose to be mission-based lenders, as CDFIs or minority depository institutions. 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 almost 1,400 CDFIs (over half of which are depository institutions) as of August 2022 and over 140 minority depository institutions as of March 2022.

During a period in which depository institutions have been providing relatively less funding to small businesses, some small businesses have increasingly relied on nondepository institutions for financing. Since nondepositories typically do not report their small business financing activities to regulators, there are no authoritative sources for either the number of such entities or the dollar value of financing they provide to small businesses. However, what data are available make clear that nondepository online lenders are increasing their share of the small business financing market.

Whether depository or nondepository, each provider of small business financing may assess 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, Federal Housing Administration, and USDA—guarantee or insure loans 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. 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. Online lenders increasingly use complex algorithms, automation, and even artificial intelligence to assess risk and make underwriting decisions, with 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. 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 merchant cash advances apply a multiple to the value of the up-front payment. Moreover, providers may add additional fees that are not standardized within industries, much less across them.

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 part, the CFPB describes its estimates of the total outstanding balances of credit in the market, the number of institutions that are active in the small business financing market, and how the CFPB arrived at these estimates. Where possible, the CFPB 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 the year prior to the onset of 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 CFPB 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. 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.

As detailed in this section, the CFPB estimates that the market for small business financing products totaled $1.4 trillion in outstanding balances in 2019. The CFPB 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. However, by July 2022, over $740 billion in Paycheck Protection Program loans had been forgiven, bringing the total market size back below $1.7 trillion. Below, the CFPB 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 shares of these three products in the overall small business financing market are difficult to assess. As detailed in this part, the CFPB 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. As of July 2022, outstanding balances for Economic Impact Disaster Loan Program and Paycheck Protection Program loans totaled $260 billion, bringing the total value of all outstanding loans and lines of credit to around $1 trillion.

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 CFPB estimates that banks and savings associations accounted for a total of about $721 billion in outstanding credit to small businesses and small farms as of December 2019. Using NCUA Call Report data for December 2019, the CFPB estimates that credit unions accounted for a total of about $55 billion in outstanding credit to members for commercial purposes. From this value, the CFPB 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 CFPB 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, online lenders, and nondepository CDFIs.

Commercial finance companies specialize in financing equipment and vehicle purchases. The CFPB estimates that the value of outstanding balances on credit extended by commercial finance companies totaled approximately $160 billion. Using data from the Board's Finance Company Business Receivables data on owned assets as of December 2019, the CFPB 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. The CFPB further assumes that about 75 percent of this value, or $162 billion, can be attributed to loans to small businesses.

Typical “fintech” providers are characterized primarily by providing financial services exclusively in an online environment. The CFPB estimates that total outstanding loan balances for such providers reached around $25 billion in 2019. Using this estimate, the CFPB scales up an estimated $9.3 billion in credit originations by online platform lenders to small and medium enterprises in 2019 to $25 billion in estimated outstanding balances, under the assumptions discussed above. At the beginning of the COVID–19 pandemic and associated financial crisis, these lenders originated around $22 billion in Paycheck Protection Program loans to small businesses from March to August 2020 and likely continued to originate billions more during the third wave of Paycheck Protection Program loans in 2021, which represents an almost 90 percent increase or more in outstanding balances since 2019. This follows already rapid growth from $1.4 billion in estimated outstanding balances in 2013.

The CFPB 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 CFPB 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.

Categorized here separately so as to distinguish residential from non-residential loans, the CFPB estimates outstanding balances for loans on 5+ unit residential dwellings to total over $30 billion. The CFPB 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.

Also categorized separately from depository institution totals so as to distinguish private from government and government-sponsored loans, the CFPB estimates that outstanding balances for loans extended by the SBA and the Farm Credit System totaled around $200 billion in 2019.

The SBA, through its traditional 7(a), 504, and microloan programs as well as the Economic Impact Disaster Loan Program and funding for Small Business Investment Companies, is the largest governmental lender by value, with $143.5 billion in outstanding balances at the end of fiscal 2019. As part of the Federal government's response to the COVID–19 pandemic, during 2020 and 2021 SBA lending increased in size by over $1 trillion due to the Paycheck Protection Program, which totaled almost $800 billion, and the Economic Impact Disaster Loan Program, which totaled $210 billion. However, as noted above, over $740 billion in Paycheck Protection Program loans had been forgiven as of July 2022, bringing SBA outstanding loan balances back down.

The Farm Credit System is another important government-related part of the small business credit landscape. The CFPB estimates that Farm Credit System lenders 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 CFPB 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 CFPB estimates that outstanding balances of such small credit to farms totaled $55 billion at the end of 2019. The CFPB 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. Considering credit extended with an origination value of between $500,000 and $5 million would increase the market size by $86 billion to $141 billion.

Mostly extended by depository institutions, the CFPB estimates that the market for small business credit cards totaled over $60 billion in outstanding balances for 2020. Using data from Y–14 Form submissions to the Federal Reserve Board, the CFPB estimates the value of outstanding balances for small business credit card accounts where the loan is underwritten with the sole proprietor or primary business owner as an applicant.

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. The CFPB estimates the total size of the equipment and vehicle leasing market for all sized businesses in 2019 to be approximately $900 billion. The CFPB further assumes that small businesses comprise around 18 percent of the total equipment and vehicle leasing market.

Factoring is a similarly significant product type, estimated at around $100 billion in market size for 2019. 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 in full; hence, a factor's risk related to repayment lies with the business's customer and not the business itself. In most cases, specific companies, called factors, provide factoring products.

The market for merchant cash advances continues to develop 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 merchant cash advance market's size. The CFPB estimates the 2019 market size to be around $20 billion. The merchant cash advance market is also of particular significance for smaller and traditionally underserved businesses that may not qualify for other types of credit. Merchant cash advances 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, merchant cash advances typically purport to be for short durations. The CFPB understands that merchant cash advances also tend to be relatively high-cost products. Several States, including New York and California, are implementing laws that will require providers of “sales-based financing,” such as merchant cash advances, as well as other nondepositories to provide disclosures (including estimated APR in some States) similar to those required under the Truth in Lending Act (TILA), which generally only applies to consumer credit.

Finally, trade credit is another significant market, which the Bureau estimates to total $51 billion in outstanding balances in 2019. The Bureau estimates the trade credit market size by adding the total accounts payable for businesses under $1 million in annual revenue. Considering the total value of accounts payable for businesses between $1 million and $5 million would increase the market size by $88 billion. 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 services without requiring immediate payment.

The CFPB estimates that there were approximately 8,200 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 CFPB estimates that about 5,100 banks and savings associations were active in the small business lending market, out of a total of about 5,200 banks and savings associations. The CFPB 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 CFPB estimates that about 1,200 out of 5,300 total credit unions were active in the small business lending market. The CFPB 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 CFPB estimates that there were about 1,900 nondepository institutions active in the small business financing market in 2019, accounting for around $550 billion in outstanding credit to small businesses. This total number of nondepository institutions includes approximately 300 commercial finance companies, 30 or more online lenders, 340 nondepository CDFIs, 150 nondepository mortgage lenders in the multifamily market, 100 merchant cash advance providers, 700–900 factors, at least 100 government lenders, and 72 Farm Credit System institutions.

The Bureau estimates that about 300 commercial finance companies were engaged in small business lending in 2019. The Bureau also estimates there to be about 30 or more online lenders that were active in the small business lending market in 2019, not including merchant cash advance providers.

The Bureau estimates that 340 nondepository CDFIs were engaged in small business lending in 2019. 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. Of these, 340 institutions reported that business finance or commercial real estate finance were a primary or secondary line of business in 2019.

The Bureau estimates that about 150 nondepository mortgage lenders participated in the credit market for 5+ unit residential dwellings in 2019. 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. 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 two loans in 2019.

Data from UCC filings indicates that about 100 institutions were active in the market for providing merchant cash advances to small businesses in 2021.

The Bureau estimates the number of factors in 2019 to be between 700–900 and assumes that most factors were providing financing to small business.

Finally, many government agencies and government-sponsored enterprises provide or facilitate a significant proportion of small business credit. As the flagship government lender, the SBA 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. (As noted above, over $740 billion in Paycheck Protection Program loans had been forgiven as of July 2022, bringing SBA outstanding loan balances back down. ) Across Federal, State, and municipal governments, the Bureau estimates that there are likely over 100 government small business lending programs. Additionally, the Farm Credit System reports that, as of December 2019, the Farm Credit System contained a total of 72 banks and associations. All of these Farm Credit System institutions were engaged in lending to small farms in 2019.

E. Challenges for Women-Owned, Minority-Owned, and LGBTQI+-Owned Small Businesses

Within the context of small business financing, women-owned, minority-owned, and LGBTQI+-owned small businesses often face relatively challenges than their counterparts to obtain credit. In line with congressional purpose, information collected about these businesses may provide opportunities for community development lending, and the information collected may be particularly important to support fair lending analysis and enforcement.

Women-owned, minority-owned, and LGBTQI+-owned small businesses have smaller cash reserves on average, leaving them less able to weather 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. 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. As a result, many small businesses, especially those owned by women, minorities, and LGBTQI+ individuals, may have a greater need for financing in general and particularly during economic downturns.

Policy responses to support small businesses in economic downturns may struggle to reach small businesses owned by women, minorities, and LGBTQI+ individuals. For example, although LGBTQI+-owned small businesses were more likely to apply for Paycheck Protection Program loans, they were less likely to receive all of the funds that they applied for, and more likely to have gotten none of the funding they applied for.

Established relationships between applicants and lenders were often critical to approvals in the earliest period of Paycheck Protection Program underwriting; many minority-owned and women-owned businesses did not have such relationships. Minority borrowers with limited English proficiency may also have faced difficulties overcoming language barriers, particularly during the first round of the Paycheck Protection Program in April 2020 when application materials had not yet been translated from English. Further, many minority-owned and women-owned firms are sole proprietorships and independent contractors, both of which received delayed access to Paycheck Protection Program loans.

Applicants whose owners belong to protected categories may have received different program outcomes when applying for Paycheck Protection Program loans, although limitations in demographic information for Paycheck Protection Program loans have hindered fair lending analyses. Even for such firms that did obtaining Paycheck Protection Program loans, they may have faced different outcomes with respect to loan forgiveness.

As demonstrated by the impact of the COVID–19 pandemic on small businesses, small business lending data are essential to better understand the small business financing landscape to maintain and expand support for this key part of the U.S. economy.

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. 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.” 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 small business lending data collected and reported pursuant to section 1071 to facilitate the enforcement of fair lending laws, and to identify business and community development needs and opportunities across the United States.

1. Facilitating Enforcement of Fair Lending Laws

Congress intended for section 1071 to “facilitate enforcement of fair lending laws,” which include ECOA, the Home Mortgage Disclosure Act of 1975 (HMDA), the Fair Housing Act, and other Federal and State anti-discrimination laws.

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.” 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.

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, gender identity, and sex characteristics), 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 Federal Consumer Credit Protection Act.

Multiple Federal regulators can enforce ECOA and Regulation B and apply various penalties for violations. The enforcement provisions 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 CFPB and multiple other Federal regulators have the statutory authority to bring actions to enforce the requirements of ECOA. 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 CFPB is required to refer matters to the Department of Justice (DOJ) when it has reason to believe that a creditor has engaged in a pattern or practice of lending discrimination. 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.

ii. Home Mortgage Disclosure Act (HMDA)

HMDA, implemented by the CFPB'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 is potential 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 is enforced by the CFPB, 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

Title VIII of the Civil Rights Act of 1968, as amended (Fair Housing Act), 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), disability, familial status, or national origin. The Fair Housing Act and its implementing regulations specifically prohibit discrimination in the making of loans, the purchasing of loans, and in setting the terms and conditions for making loans available, without reference to consumers, legal entities, or the purpose of the loan being made, although these prohibitions relate exclusively to dwellings.

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. 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, 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. In Fair Housing Act 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.

Upon receipt of a complaint alleging facts that may constitute a violation of the Fair Housing Act or upon receipt of information from a consumer compliance examination or other source suggesting a violation of the Fair Housing Act, 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 Fair Housing Act, to the DOJ. Private parties may also bring claims under the civil enforcement provisions of the Fair Housing Act.

iv. Other Fair Lending Laws

Several other Federal statutes seek to promote fair lending. The CRA affirmatively encourages 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. (See part II.F.2.i below for additional discussion of the CRA.) The Americans with Disabilities Act of 1990 prohibits discrimination against persons with disabilities in the provision of goods and services, including credit services. Sections 1981 and 1982 of the Federal Civil Rights Acts are broad anti-discrimination laws that have been applied to many aspects of credit transactions.

Many States and municipalities have also enacted fair lending, fair housing, and/or civil rights laws (often modeled on their Federal counterparts) that broadly prohibit credit discrimination, including protections for business credit.

v. Facilitating Enforcement

To achieve the congressionally mandated purpose of facilitating enforcement of fair lending laws, the Bureau 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 reporting in order to also use these data in their prioritization, peer analysis, redlining reviews, and screening processes to select institutions for monitoring, examination, or investigation. Data collected pursuant to section 1071 will facilitate more efficient fair lending examinations. For example, regulators will be able to use pricing and other data to prioritize fair lending examinations—without such data, some financial institutions might face unnecessary examination burden while others whose practices warrant closer review may not receive sufficient scrutiny.

Moreover, as discussed in part V below, the Bureau believes specific aspects of the rule offer particular benefits for the enforcement of fair lending laws. For example, the inclusion of pricing data such as interest rate and fees will provide information on disparities in pricing outcomes, and data such as gross annual revenue, denial reasons, and time in business will enable a more refined analysis and understanding of disparities in both underwriting and pricing outcomes. While these data alone generally will not establish compliance with fair lending laws, regulators, community groups, researchers, and financial institutions will be able to use the data to identify potential disparities in small business lending based on disaggregated categories of race and ethnicity. Overall, the data collected and reported under the rule will allow, for the first time, for comprehensive and market-wide fair lending risk analysis that enables a better understanding of disparities in both underwriting and pricing outcomes.

2. Identifying Business and Community Development Needs and Opportunities

The second congressionally mandated 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. While section 1071 does not expressly define the phrase “business and community development needs,” other Federal statutes and regulations, including the CRA and the Riegle Community Development and Regulatory Improvement Act of 1994, 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 its rule implementing section 1071 will 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 data provided under this rule, the public will 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 will not only assist in identifying potentially discriminatory practices, but will contribute to a better understanding of the experiences that members within certain communities may share in the small business financing market.

Increased transparency about application and lending practices across different communities will improve credit outcomes, and thus community and business development. Lenders will be able to better understand small business lending market conditions and determine how best to provide credit to borrowers, where currently they cannot conduct very granular or comprehensive analyses because the data on small business lending are limited. As reduced uncertainty helps lenders to identify potentially profitable opportunities to extend responsible and affordable credit, small businesses stand to benefit from increased credit availability. Transparency will also allow small business owners to more easily compare credit terms and evaluate credit alternatives; without these data, small business owners are limited in their ability to shop for the credit product that best suits their needs at the best price.

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.” 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.

The legislative history for the CRA suggests that the concerns motivating its passage included certain practices by banks including redlining ( i.e., declining to extend credit in neighborhoods populated by ethnic or racial minorities) and community 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). 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.” These requirements were first implemented by a 1978 rulemaking, and were amended in 1995 and 2005. These rulemakings, adopted by each of the agencies responsible for ensuring compliance with the CRA, established specific performance measures, requiring banks to disclose information about their efforts to meet community credit needs via small business, small farm, and community development lending.

The agencies tasked with ensuring compliance—including the OCC, the Board, and the FDIC —evaluate each insured depository institution's record in helping meet the credit needs of its entire community. 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.” 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 individuals; (2) community services for low- and moderate-income individuals; (3) activities that promote economic development by financing small business and small farms; and (4) activities that revitalize or stabilize low- and moderate-income geographies, disaster areas, and certain distressed or underserved middle-income areas based on other factors.

In May 2022, the Board, FDIC and OCC issued an interagency notice of proposed rulemaking for amendments to update and expand the existing CRA regulations (2022 CRA NPRM). In the 2022 CRA NPRM, these three agencies proposed a number of revisions to the agencies' CRA rules, including a number of key changes relating to how the agencies defined community development and how the agencies intended to measure the community development activity of depository institutions.

In the 2022 CRA NPRM, the agencies recognized the value of data to be collected under the Bureau's small business lending rule for assessing efforts at addressing community small business and small farm credit needs, proposing to incorporate aspects of the Bureau's rule into their CRA rules. First, the agencies proposed to define the terms “small business” and “small farm” consistent with the Bureau's proposal under section 1071, i.e., as those having gross annual revenues of $5 million or less in the preceding fiscal year.

Further, the 2022 CRA NPRM proposed to eliminate the current CRA small business and small farm data collection and reporting requirements, to be replaced in the long term by the Bureau's small business lending data collection and reporting requirements. The agencies noted that this proposed approach is responsive to various stakeholders' requests that the agencies coordinate the small business and small farm definitions across the CRA and section 1071 rulemakings. The agencies also observed that their proposal would reduce burden related to data collection and reporting, particularly if institutions could submit data for CRA purposes under the format of the Bureau's small business lending rule. Data collected pursuant to section 1071 would be used to measure individual bank performance in CRA assessments, and to establish the agencies' benchmarks against which bank CRA performance would be measured for purposes of the small farm and small business portions of the retail lending tests.

Finally, the agencies proposed that if both the CRA and section 1071 rulemakings were finalized, the agencies would make the compliance date for the CRA amendments that hinge upon the Bureau's section 1071 rulemaking similar to the compliance date for the Bureau's final rule.

ii. Community Development Financial Institution Fund (CDFI Fund)

The Riegle Community Development and Regulatory Improvement Act of 1994 authorized the CDFI Fund. 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.”

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.

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.” 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 who lack adequate access to capital and financial services and residents of economically distressed communities.

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. The CDFI Fund also publishes the data it receives with appropriate redactions to protect privacy interests. However, given that CDFIs comprise a relatively small share of the overall small business lending market, 1071 data will materially enhance understanding of the broader extent of community development outside of areas where CDFIs already operate. These data will also likely augment the data the CDFI Fund already receives.

In May 2020, the CDFI Fund issued a request for comment on several aspects of its CDFI program, including proposed changes to the application for certification, as well as proposed changes to the data collection and reporting processes of the CDFI Fund. The RFI proposed a number of other revisions to the data collection and reporting regime in May 2020, including the automation of key elements of existing reporting and improvements to data quality.

In October and November 2022, the CDFI Fund announced that based on public comments, it had revised its proposed changes to the application for certification, and data collection and reporting requirements, subject to another round of public comment prior to the anticipated implementation of changes in April 2023. The CDFI Fund released a preview of changes to the application requirements. One change to the Primary Mission portion of the application, which asks whether an applicant is focused on the mission of community development, would be the addition of bright-line questions related to an organization's lending and financing practices. Specifically, an applicant can be disqualified from CDFI certification if financial products or practices it offers are harmful to low-income and underserved communities. The bright-line questions the new certification application would ask include whether, amongst other things, applicants consider a small business borrower's ability to repay a loan on its terms, whether they have accommodative or concessionary policies or programs for struggling borrowers, and whether loans priced above 36 percent APR meet certain safety and consumer protection standards.

In October 2022, the CDFI Fund also published revisions to the Target Market requirements of the application for CDFI certification. Currently, an applicant must demonstrate that it serves at least one eligible Target Market (either an Investment Area or a Targeted Population). The revisions, if finalized, would eliminate the geographical boundaries and mapping requirements for most Target Markets, replacing these requirements with customized investment areas. In late October 2022, the CDFI Fund published a proposed list of pre-approved methodologies to identify target markets. These methodologies include determining whether most recipients of a CDFI applicant's funds—whether individuals, for-profit entities, or non-profit entities—are members of certain demographic groups (African American, Hispanic, Native American, Native Hawaiian, Native Alaskan, Other Pacific Islanders, people with disabilities, certified CDFIs, low-income targeted populations). These data are collected using a variety of overlapping methods specific to each demographic status, including self-reporting, in-person or photo-identification-based visual observation, surname analysis, government-issued or Tribal-issued identification to demonstrate affiliation, and/or income and residence or business location.

The most recently published amendments to the application requirements remain under consideration by the CDFI Fund.

3. Impact of Small Business Lending Data Under Section 1071

The Bureau's implementation of section 1071 will provide on an annual basis application-level data on small business credit, including certain protected demographic information. This will 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 will enable stakeholders of all kinds in the small business lending market to gain insight into trends in small business lending. It will also provide insight into the interaction of supply and demand for small business credit over time.

In terms of facilitating fair lending enforcement, interested government agencies and other stakeholders will be able to use data collected and reported under this final rule to identify possible fair lending risks using statistical methods.

Regarding the identification of business and community development needs, small business lending data collected and reported under this final rule will 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. By reducing uncertainty about the conditions of the small business lending market, data collected under the final rule can help creditors identify potentially profitable opportunities to extend responsible and affordable credit, potentially increasing credit availability to small businesses. Increased transparency, in turn, will also help small business borrowers to understand what credit is available and on what terms, thereby improving their ability to access the credit they need and further serving community and business development goals.

The Bureau believes that small business lending data will come to play an important role for the small business lending market, 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, these 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 small business lending data collected and reported under this final rule will provide the Bureau and other stakeholders with critical insights into the small business lending market. The COVID–19 pandemic has shown that transparency is essential at a time of crisis, when small businesses may be in urgent need of credit in order to recover from economic shocks.

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. Given the critical importance of small businesses to economic growth and wealth creation, that will also help the economy as a whole.

III. Summary of the Rulemaking Process

In the years leading up to the release of the CFPB's NPRM to implement section 1071 of the Dodd-Frank Act, the CFPB held over 100 outreach meetings regarding the rulemaking with financial institutions, trade associations, community groups, researchers, governmental entities, and other stakeholders. The CFPB also took a number of other steps, beyond individual stakeholder meetings, to solicit feedback more broadly from the public on a rule to implement section 1071. Most recently, the CFPB received public comments on its NPRM. Each of these efforts are discussed in turn below.

A. Pre-Proposal Outreach and Engagement

Request for information, field hearing, and white paper on small business lending. On May 10, 2017, the CFPB published a request for information regarding the small business lending market 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, and privacy concerns related to the disclosure purposes of section 1071. On the same date, the CFPB held a field hearing regarding section 1071 at which the request for information 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. Finally, at the same time, the CFPB also published its White Paper on small business lending, which reflected the initial findings of its 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 CFPB held a symposium on section 1071 to assist it 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. 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 CFPB's request for information.

Small Business Advisory Review Panel. Under the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), which amended the Regulatory Flexibility Act (RFA), the CFPB 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. The Panel considers the impact of the proposals under consideration by the CFPB 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 CFPB, 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 for this SBREFA process. These individuals represented small businesses that are financial institutions—including community banks, credit unions, community development financial institutions (CDFIs), financial technology firms, and commercial finance companies—that would likely be directly affected by a rule implementing section 1071.

On September 15, 2020, the CFPB issued its Outline of Proposals under Consideration and Alternatives Considered (SBREFA Outline) for its rulemaking pursuant to section 1071, a detailed document that discusses (1) the relevant law, (2) the regulatory process, (3) the rule proposals the CFPB was considering, and (4) an economic analysis of the potential impacts of those proposals on directly affected small entities.

The CFPB convened the Panel for this proposed rule on October 15, 2020 and held a total of four meetings with small entity representatives 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 small entity representatives were included throughout the SBREFA Outline.

In advance of the Panel Outreach Meetings, the CFPB, SBA Office of Advocacy, and OIRA held a series of video conferences with the small entity representatives to describe the Small Business Review Process, obtain important background information about each small entity representative's current business practices, and begin discussions on selected portions of the proposals under consideration.

All 20 small entity representatives participated in the Panel Outreach Meetings. Representatives from the CFPB, SBA Office of Advocacy, and OIRA provided introductory remarks. The meetings were then organized around discussions led by the CFPB about each aspect of the proposals under consideration and the potential impact on small businesses. The CFPB also invited small entity representatives to submit written feedback by November 9, 2020; most did so.

On December 15, 2020, the CFPB 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 (SBREFA Panel Report). This report includes a summary of the feedback received from small entity representatives 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. As required by the RFA, the CFPB considered the Panel's findings in its initial regulatory flexibility analysis, as set out in part VIII of the NPRM.

The CFPB also invited other stakeholders to submit feedback on the SBREFA Outline by December 14, 2020. The CFPB received approximately 60 submissions from a variety of other stakeholders, including financial institutions, trade associations, community groups, a think tank, and a government agency.

The CFPB considered the feedback it received from small entity representatives, the findings and recommendations of the Panel, and the feedback from other stakeholders in preparing the NPRM. The feedback, findings, and recommendations were summarized throughout the NPRM where relevant.

One-Time Cost Survey. On July 22, 2020, the CFPB released a voluntary survey to measure the one-time costs of compliance with an eventual small business lending data collection rule. 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 deadline for responses was October 16, 2020. The CFPB received responses from 105 financial institutions. The results of the survey inform the CFPB's analyses of the potential impacts of the rule as set out in parts IX and X below.

ECOA request for information. On July 28, 2020, the CFPB issued a request for information to seek public input on ECOA and Regulation B. In this request for information, the CFPB sought public comment on a number of topics, including small business lending and the ways that the CFPB, 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.

B. Ongoing Outreach and Engagement

Ongoing outreach. The CFPB 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 CFPB's recent outreach has been the impacts of the pandemic and the effectiveness of the Federal government's response. Findings from outreach activities inform the CFPB on matters affecting the small business sector.

Technical outreach. In the months before the publication of the NPRM, the CFPB 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 small business lending data to the CFPB. With these software vendors and technical staff, the CFPB has held and, after publication of this final rule, will continue to hold discussions concerning the technical systems and procedures the CFPB will provide for financial institutions to submit their data. The CFPB intends to understand the technology solutions currently provided by vendors to support the small business lending activities of financial institutions, as well as their experience in providing financial institutions with technical support for previous data collection regulations. The CFPB believes this information will be helpful in informing the CFPB in its design and implementation of a platform for intake and processing of data to help the platform integrate, to the extent possible, with existing systems and data collection procedures. These discussions also serve to raise awareness of technology providers as to their potential future role in supporting the 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 this final rule. This outreach process is ongoing and will continue after the publication of this final rule.

Sample data collection form usability testing. After the NPRM was released, the CFPB, after the appropriate notice in the Federal Register , and a 30-day comment period, sought and received OMB approval to conduct several rounds of message and user testing research related to the sample form. The CFPB conducted qualitative research to learn about the experience of filling out the sample data collection form and to explore design options. The CFPB engaged a vendor to conduct interviews with small business stakeholders and listening sessions with small business owners to test different versions of the introductory language on the sample data collection form. The CFPB also conducted qualitative user interviews with small business owners to test their reactions to different versions of the sample data collection form. In addition to comments received in response to the CFPB's proposed sample data collection form as part of the NPRM, the feedback gathered as part of these testing efforts was also considered by the CFPB in finalizing the sample data collection form issued with this final rule. The CFPB is releasing a report, simultaneously with the issuance of this final rule, summarizing the findings from all three rounds of qualitative research testing.

C. Notice of Proposed Rulemaking

On September 1, 2021, the CFPB issued its proposal to implement section 1071. The NPRM was published in the Federal Register on October 8, 2021, and the public comment period closed on January 6, 2022. The CFPB received approximately 2,100 comments on the proposal during the comment period. Approximately 650 of these comments were unique, detailed comment letters representing diverse interests. These commenters included lenders such as banks and credit unions, CDFIs, community development companies, Farm Credit System lenders, online lenders, and others; national and regional industry trade associations; software vendors; business advocacy groups; community groups; research, academic, and other advocacy organizations; members of Congress; Federal and State government offices/agencies; small businesses; and individuals.

The remaining comments included some duplicate submissions ( i.e., letters with the same content from the same commenter submitted through multiple channels, or letters with the same content submitted by multiple people on behalf of the same commenting organization) as well as comments that were part of several comment submission campaigns organized by industry or community groups. Such comment campaigns typically advocated for or against particular provisions in the NPRM and urged additional changes. These comments were considered by the CFPB along with all other comments received, including any additional remarks included in otherwise identical comment letters.

In addition, the CFPB also considered comments received after the comment period closed via approximately 17 ex parte submissions and meetings. Materials on the record, including all ex parte submissions and summaries of ex parte meetings, are available on the public docket for this rulemaking.

The CFPB received comments on all aspects of the proposed rule, as well as on the proposed approach to protecting privacy interests via modification or deletion of data prior to publication, and on its analyses of the proposed rule's impacts. Relevant information received via comment letters, as well as ex parte submissions, is discussed below in the section-by-section analysis and subsequent parts of this document, as applicable. The CFPB considered all the comments it received regarding the proposal, made certain modifications, and is adopting the final rule as described in part V below. Comments relevant to the CFPB's approach to privacy are discussed in part VIII and regarding its impact analyses in parts IX to XI.

IV. Legal Authorities

The Bureau is issuing this final rule pursuant to its authority under section 1071. Some aspects of this rule are also adopted 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 characteristics, race, color, religion, national origin, and sex. The Bureau has certain oversight, enforcement, and supervisory authority over ECOA requirements and has rulemaking authority under the statute.

ECOA is implemented in Regulation B. 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.

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. 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. 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. 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 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 is implementing in this final 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.

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 to be promulgated by the Bureau 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 data available to the public generally.

Two provisions expressly give the Bureau discretion with respect to public availability of small business lending data. Specifically, ECOA section 704B(e)(4) states that the Bureau may, at its discretion, delete or modify 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 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 CFPB first provides some background regarding section 1071, a discussion of the Home Mortgage Disclosure Act of 1975 (HMDA), and a brief summary of the final rule. Each regulatory provision of the final rule, along with its rationale and relevant feedback received through the public comment process, is discussed in detail in the section-by-section analyses that follow. The CFPB has made several major, and a number of minor, adjustments to the rule in response to comments received on the proposal. Major changes are noted in the summary of the final rule below; all changes are discussed in detail in the section-by-section analyses that follow.

Next, the CFPB discusses the high-level and general comments received in response to the NPRM. The CFPB also addresses several issues for which there is no corresponding regulatory text or commentary. Finally, the CFPB discusses the conforming amendments it is making to existing Regulation B.

A. Introduction to Section 1071

As discussed above, section 1071 of the Dodd-Frank Act requires that financial institutions collect and report to the CFPB 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 CFPB to require any additional data that it 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 data and publication of data. In addition, section 1071 permits the CFPB 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 CFPB 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 CFPB to adopt exceptions to any requirement or to exempt financial institutions from the requirements of section 1071 as it deems necessary or appropriate to carry out the purposes of section 1071. Section 1071 also directs the CFPB 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, the CFPB's rule implements these statutory provisions.

B. Section 1071 and HMDA

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 CFPB's Regulation C, 12 CFR part 1003, implements HMDA. In light of certain similarities between section 1071 and HMDA as data collection and reporting statutes with different markets but similar fair lending enforcement and community development purposes, the CFPB's section-by-section analyses in this part V sometimes discusses how similar provisions are addressed in the context of HMDA. Of course, the markets to which HMDA and section 1071 apply are also different in significant respects, and those differences are reflected between the present rule and Regulation C, as discussed further in the section-by-section analyses in this part V.

HMDA and Regulation C'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 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: information about the applicants, borrowers, and underwriting process, information about the property securing the loan or proposed to secure the loan, information about the features of the loan, certain unique identifiers.

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 and modified loan/application register become publicly available on the FFIEC's HMDA Platform. 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 are also publicly available on the same platform, which also allows users to create custom datasets, reports, and visualizations from the HMDA data.

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 examination process, and also use HMDA data in conducting CRA performance evaluations. HMDA data provide the public with information on the home mortgage lending activities of particular reporting entities and on activity in their communities. These data 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 Final Rule

The CFPB is adding a new subpart B to Regulation B to implement the requirements of section 1071. The CFPB is also making some conforming amendments to existing Regulation B. The CFPB's final rule 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. The CFPB is amending 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, women-owned, or LGBTQI+-owned business, in certain circumstances.

The Bureau is also making other nonsubstantive conforming edits in existing Regulation B to maintain consistency and avoid confusion.

Authority, purpose, and scope (§ 1002.101). Section 1002.101 sets forth the authority, purpose, and scope for subpart B. Among other things, this section states 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). Section 1002.102 includes a number of definitions for terms used in subpart B, which generally fall into several categories. First, some definitions refer to terms defined elsewhere in subpart B—specifically, terms of particular importance including business, covered application, covered credit transaction, covered financial institution, financial institution, and small business. Second, some definitions refer to terms defined elsewhere in existing Regulation B ( i.e., business credit, credit, and State) or other regulations ( i.e., a portion of the definitions of small business and affiliate reference an SBA regulation). Finally, the remaining terms are defined in § 1002.102, including applicant, closed-end credit transaction, LGBTQI+ individual, LGBTQI+-owned business, 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). Section 1002.103 defines what is, and is not, a covered application under subpart B; this definition triggers data collection and reporting requirements under subpart B for covered financial institutions. The CFPB is defining 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. 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 and excluded transactions (§ 1002.104). The CFPB is requiring 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. Section 1002.104(a) defines the term covered credit transaction as an extension of business credit that is not an excluded transaction under § 1002.104(b). Loans, lines of credit, credit cards, and merchant cash advances (including credit transactions for agricultural purposes) all fall within the scope of the rule. Section 1002.104(b) excludes from the requirements of subpart B trade credit, HMDA-reportable transactions, insurance premium financing, public utilities credit, securities credit, and incidental credit. Factoring, leases, consumer-designated credit used for business or agricultural purposes, and credit transaction purchases, purchases in a pool of credit transactions, and purchases of a partial interest in a credit transaction also are not covered credit transactions.

Covered financial institutions and exempt institutions (§ 1002.105). The CFPB is defining in § 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 definition, subpart B's requirements 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, Farm Credit System lenders, lenders involved in equipment and vehicle financing (captive financing companies and independent financing companies), commercial finance companies, governmental lending entities, and nonprofit nondepository lenders. Subpart B does not cover motor vehicle dealers. Section 1002.105(b) defines the term covered financial institution as a financial institution that originated at least 100 covered credit transactions for small businesses in each of the two preceding calendar years. Only financial institutions that meet this loan-volume threshold are required to collect and report small business lending data under subpart B.

Business and small business definitions (§ 1002.106). Section 1002.106 adopts the SBA's definitions of “business concern or concern” and “small business concern” as set out in the Small Business Act and SBA regulations. Notwithstanding the small business size standards established by SBA regulations, for purposes of subpart B, a business is a small business if its gross annual revenue is $5 million or less for its preceding fiscal year. The SBA Administrator has approved the CFPB's use of this alternate small business size standard pursuant to the Small Business Act. Every five years after January 1, 2025, the need to adjust the gross annual revenue threshold for inflation or deflation will be determined using the Consumer Price Index for all Urban Consumers.

3. Compiling, Maintaining, and Reporting Small Business Lending Data (§§ 1002.107 Through 1002.111)

Compilation of reportable data (§ 1002.107). Section 1002.107 addresses several aspects of collecting data on covered applications from small businesses. Section 1002.107(a) requires financial institutions to compile and maintain the data points enumerated in § 1002.107(a)(1) through (20). These data points must be collected and reported in accordance with the rule and the Filing Instructions Guide that the CFPB will provide for the appropriate filing year. Certain of these data points are or could be collected from the applicant (or otherwise determined based on information from appropriate third-party sources); other data points are based on information within the financial institution's control. Appendix E provides a sample data collection form for requesting protected demographic information. Although the form reflects a number of legal requirements applicable to collection, use of the form itself is not mandatory. It is intended as an available implementation resource for lenders, who can make use of it if they so choose.

Section 1002.107(c)(1) provides that covered financial institutions must not discourage an applicant from responding to requests for applicant-provided data and must otherwise maintain procedures to collect such data at a time and in a manner that are reasonably designed to obtain a response. Where data are collected directly from the applicant, § 1002.107(c)(2) identifies certain minimum provisions that must be included within financial institutions' procedures in order for them to be considered “reasonably designed.” The rule 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 § 1002.107(b), financial institutions are permitted to rely on information from the applicant or appropriate third-party sources, although for most data points if the financial institution verifies the information provided it must report the verified information. Section 1002.107(d) permits financial institutions to reuse certain previously collected data in certain circumstances.

Firewall (§ 1002.108). Section 1002.108 implements section 1071's requirement that certain data collected pursuant to section 1071 be shielded from certain persons if feasible; the CFPB refers to this as the “firewall.” Pursuant to § 1002.108(b), if an employee or officer of a covered financial institution or a covered financial institution's affiliate is involved in making any determination concerning a covered application from a small business, that employee or officer is prohibited from accessing the applicant's responses to regarding protected demographic information requested under this final rule.

However, pursuant to § 1002.108(c), this prohibition does not apply to an employee or officer if the financial institution determines that employee or officer should have access to the 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. The notice must be provided to each applicant whose information will be accessed or, alternatively, the financial institution may also provide the notice to applicants whose responses will not or might not be accessed. For example, a financial institution could provide the notice to all applicants or all applicants for a specific type of product. The CFPB is providing sample language that a financial institution can, but is not required to, use for this notice.

Reporting of data to the Bureau (§ 1002.109). Section 1002.109 addresses several aspects of covered financial institutions' obligations to report small business lending data to the CFPB. First, § 1002.109(a) provides that data must be collected on a calendar year basis and reported to the CFPB on or before June 1 of the following year. Section 1002.109(a) also addresses collection and reporting requirements of subsidiaries of financial institutions and reporting requirements of financial institutions where multiple financial institutions are involved in a transaction. Second, the CFPB lists in § 1002.109(b) the information that financial institutions are required to provide about themselves when reporting data to the CFPB, including the financial institution's name, headquarters address, contact person, Federal prudential regulator, institutional identifiers, parent entity information, as well as information on the type of financial institution it is, and whether it is reporting covered applications voluntarily. Finally, § 1002.109(c) addresses technical instructions for the submission of data to the CFPB, including information about the Filing Instructions Guide, which the CFPB will provide for the appropriate year.

Publication of data and other disclosures (§ 1002.110). Section 1002.110 addresses several issues regarding the publication of small business lending data. Section 1002.110(a) provides that the CFPB will make available to the public, on an annual basis, the data submitted to it by financial institutions. These data will be made available subject to deletions or modifications made by the CFPB, if the CFPB determines that such deletions or modifications would advance a privacy interest. Part VIII below discusses the CFPB's preliminary assessment of how best to determine appropriate pre-publication modifications and deletions, particularly in light of re-identification risk to small businesses and their owners. Section 1002.110(b) provides that the CFPB may compile and aggregate data submitted by financial institutions and may publish such compilations or aggregations.

Section 1002.110(c) requires a covered financial institution to publish on its website a statement that its small business lending data, as modified by the CFPB, are or will be available from the CFPB. Section 1002.110(d) sets 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 satisfy financial institutions' statutory obligation to make data available to the public upon request.

Finally, § 1002.110(e) prohibits a financial institution or third party from disclosing protected demographic information, except in limited circumstances. Section 1002.110(e)(1) prohibits a financial institution from disclosing or providing to a third party the protected demographic information it collects pursuant to the rule, except to further compliance with ECOA or Regulation B or as required by law. Section 1002.110(e)(2) prohibits a third party that obtains protected demographic information for the purpose of furthering compliance with ECOA and Regulation B from any further disclosure of such information, except to further compliance with ECOA and Regulation B or as required by law.

Recordkeeping (§ 1002.111). Section 1002.111 addresses several aspects of the recordkeeping requirements for small business lending data. First, § 1002.111(a) requires a covered financial institution to retain evidence of compliance with 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 CFPB pursuant to § 1002.109. Second, § 1002.111(b) requires a covered 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, § 1002.111(c) requires that, in compiling, maintaining, and reporting its small business lending application register, as well as the separately maintained protected demographic information pursuant to § 1002.111(b), a financial institution may 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). Section 1002.112 addresses several issues related to the enforcement of subpart B. First, § 1002.112(a) states that a violation of section 1071 or subpart B is subject to administrative sanctions and civil liability as provided in sections 704 and 706 of ECOA. Second, § 1002.112(b) provides 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. Such an error is presumed not to violate ECOA or subpart B if the number of such errors do not exceed the thresholds set forth in appendix F. Third, § 1002.112(c) identifies four safe harbors under which certain errors—specifically those regarding the application date, census tract, and NAICS code data point, along with incorrect determinations of small business status, covered transaction, and covered application—do not constitute violations of ECOA or subpart B. Relatedly, in part VII below, the CFPB discusses its intention to consider, for financial institutions subject to the CFPB's jurisdiction, good faith efforts to comply with the rule and will not generally assess penalties for errors in data reporting. The CFPB will conduct examinations on data during the grace period to assist institutions in diagnosing compliance weaknesses.

Severability (§ 1002.113). Section 1002.113 provides that any provision of subpart B, or any application of a provision, is stayed or determined to be invalid, it is the CFPB's intent that the remaining provisions shall continue in effect.

Effective date, compliance date, and special transitional rules (§ 1002.114). Section 1002.114 addresses several issues related to the rule's effective date, when covered financial institutions are required to comply with the rule, and associated transitional rules. Section 1002.114(a) provides that this final rule will become effective 90 days after publication in the Federal Register . However, pursuant to § 1002.114(b) compliance with the final rule is based on a tiered compliance date schedule. Compliance with the rule beginning October 1, 2024 is required for covered financial institutions that originate the most covered credit transactions for small businesses. However, institutions with a moderate transaction volume have until April 1, 2025 to begin complying with the rule, and those with the lowest volume have until January 1, 2026. Next, § 1002.114(c) provides certain transitional provisions that permit covered financial institutions to begin collecting protected applicants' demographic information beginning 12 months prior to their applicable compliance dates. Finally, § 1002.114(c) also permits financial institutions that do not have ready access to sufficient information to determine their compliance tier (or whether they are covered by the rule at all) to use any reasonable method to estimate their volume of originations to small businesses for this purpose.

D. High-Level and General Comments

1. High-Level and General Comments on the NPRM

High-level and general comments received on the NPRM are discussed here, followed by a discussion of comments specifically addressing implementation issues and comments regarding section 1071's overlap with other data reporting regimes. Comments received on specific aspects of the Bureau's proposed rule are discussed in the section-by-section analyses that follow in this part V. Comments regarding the privacy analysis are addressed in part VIII below, and regarding the Bureau's analysis of impacts in parts IX through XI.

Comments Received

Support for section 1071's statutory purposes was nearly universal amongst commenters, at least at a high level of generality. (See also the section-by-section analysis of § 1002.101 below.) The vast majority of industry commenters praised the purposes of the rule, and the intentions behind section 1071 and ECOA generally, while offering criticisms of specific provisions of the proposed rule.

Broad support. A number of commenters offered general support for the rule, including its scope and its purposes. For example, a trade association stated its appreciation for the comprehensive nature of the proposed rule, noting that the Bureau conducted extensive outreach and worked at ensuring proper and effective rulemaking consistent with legislative intent while allowing for technical improvements and practical considerations. A community group stated that to achieve the community development and fair lending purposes of the statute, the data collected and reported under the rule needs to be comprehensive in its coverage of lenders and must capture key credit underwriting factors as controls for analyses of gender and racial disparities in lending. The commenter also stated that the Bureau recognized that annual disclosure of lending data by the vast majority of small business lenders is a prerequisite for adequate oversight, given that existing data are insufficient. The commenter further explained that existing data consist of periodic surveys that are not usually lender specific and that are inconsistent in the amount of detail provided on key underwriting variables needed for analyses of community needs and fair lending compliance.

A number of commenters offered more specific support for the rule's purposes. One trade association noted that its members have been active in the development of policy supporting section 1071, including participation as small entity representatives during the SBREFA process. A number of banks, a credit union, and several trade associations expressed support for the statutory purposes of section 1071 and the Bureau's proposed rule. One trade association stated that the NPRM was a key opportunity to explore lending data and expand responsible small business lending, which was important to the financial well-being in the communities served by its members, as well as stability of the overall financial system.

A cross-sector group of lenders, community groups, and small business advocates stated that it is critical to require lenders to collect and report applicant data for as many small minority-owned and small women-owned businesses as possible, to uphold congressional intent and establish a comprehensive database.

Several commenters focused on the importance of the fair lending purpose of section 1071. One trade association stated its unequivocal agreement with the purpose of preventing discrimination on the basis of ethnicity, race, and sex, and noted that CDFI lenders share the Bureau's core value of protecting consumers by providing fair and transparent financial products and services to all customers.

A number of commenters, including community banks, credit unions, and trade associations, offered their appreciation for the stated intentions of the rule in the NPRM—to support fair lending and business and community development—but expressed concern about the effect of the rule as proposed on lending and compliance costs. A bank stated that, while it supported the statutory goals of section 1071, the proposed rule would result in restricted, higher-priced credit for the groups the proposal is meant to benefit. A trade association for community banks likewise supported the proposed rule and the congressional intent behind section 1071, but asserted it was necessary to fine-tune specific proposed provisions to mitigate costs and ensure small business lenders remain active, particularly those serving the most underserved markets. Another trade association supported the goals of the NPRM, but worried that the proposed would unduly burden credit unions and would discourage them from offering business credit.

Broad criticisms. Some industry commenters expressed disagreement with the enactment of section 1071 and therefore opposed the rule in its entirety. One lender opposed the rule on the grounds that it already complies with fair lending laws, and that the rule would force a choice between compliance and market exit. Another argued that the Dodd-Frank Act may have intended that section 1071 create a HMDA-like data reporting mechanism, but warned that small business lending is not “cookie-cutter,” is not automated, and is highly relationship driven. Another commenter claimed that it would be impossible to derive any meaningful or statistically valid conclusions from a comparison of small business loans.

A credit union stated that the publication of data collected and reported pursuant to section 1071 would not permit it to better identify its members' unmet small business lending needs aside from confirming if there is a significant difference in the number of business borrowers that are female or of a specific race.

One trade association noted that credit unions may only serve their members and are limited by Federal statute in their ability to offer business loans; as a result, data collected from them would not be comparable to data collected from lenders without similar limitations in who they may serve.

Other commenters, without specifically opposing the enactment of section 1071, expressed more general concerns about the NPRM. Trade associations for online lenders supported the policy goals of the NPRM and also believed that modifications should be made to support responsible innovation in banking without unintentionally stifling the efficiency and innovation that digital lending platforms can provide. A bank supported the enforcement of fair lending laws and appreciated the Bureau's dedication to better supporting small businesses, but was concerned about aspects of the NPRM. A One commenter inquired as to why the Bureau, in charge of consumer financial protection, was concerned with business loans, and claimed that the Bureau was engaged in overreach.

The role of online lenders. Two trade associations suggested that online and “fintech” lenders were important to expanding access to financing, particularly for Black- and Hispanic-owned businesses. These commenters expressed their support for greater transparency and expanding access to sustainable and fair credit in small business lending. They also asserted that women-owned and minority-owned small businesses were disadvantaged in applying for small business lending at traditional banks, and that nontraditional online lenders play a crucial role in modernizing financial services and improving access and outcomes for small businesses. One of the commenters noted that, in particular, the use of artificial intelligence, machine learning, and alternative data would expand lending to minority-owned small businesses.

Uniqueness of small business lending. One bank stated that it was hard to perform comparative analysis on small business loans because they are unique and manually unwritten. Further, the commenter stated that the absence of certain credit criteria or metrics—such as collateral, loan-to-value, debt-to-income, debt service coverage ratio and the like—in the data points to be collected by the rule could cause reviewers of published data, such as consumer groups and agency examiners, to draw incorrect conclusions on variances in rates and terms of loans.

Data accuracy. A bank and a trade association asserted that the Bureau's final rule should focus on ensuring the collection and reporting of high-quality data that maximizes data accuracy and reliability. These commenters noted that inaccurate, unreliable, and poor-quality data could undermine the statutory purposes of section 1071, which the commenters said were to promote access to credit for minority-owned and women-owned small businesses. They further stated that poor data quality could also lead to misguided and factually unsupported fair lending allegations, which could damage the reputations of responsible lenders and subject them to unnecessary investigative burdens and lawsuits, all of which could undermine the Bureau's credibility and waste the Bureau's time and resources. Based on these premises, the commenters sought the elimination of certain provisions which they believed would undermine the collection of accurate, reliable, high-quality data (discussed in the applicable section-by-section analyses that follows).

Specific uses of small business lending data. Two trade associations urged the Bureau to explain how it would use the data collected under this rule, including how it would analyze data collected by the rule. One claimed that the NPRM did not outline potential uses for small business lending data, and asserted that the Bureau should provide notice and comment on potential uses of the rule, even after the issuance of the final rule. The commenter stated that it is important for the Bureau to issue guidance on how it plans to analyze data reported under the rule, including how it will assess whether lenders appropriately serve relevant markets, which can vary significantly by lending product.

The other commenter stated that the Bureau should clearly indicate how implementing the proposed framework will advance fairness and understanding of small business credit needs, that requirements should tie to satisfying stated objectives and designed no more broadly than necessary to reduce unnecessary costs to small business lenders. The commenter stated its belief that by clearly indicating how it will use data it collects, including whether and how it will make such information public, the Bureau will allow stakeholders to assess better the costs and benefits of the overall framework. Additionally, the Bureau should carefully consider potential unintended consequences—especially related to data publication—that could reduce small business credit access and chill further innovation aimed at better serving small businesses.

Responses to Comments Received

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 commenters is consistent with the statutory purposes of section 1071. The Bureau does not believe that 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 §§ 1002.104 and 1002.105 below.

Broad support. Regarding the comment on the scope of the rule, that the Bureau should continue to monitor U.S. Census data to ensure that its definition of small business in this rule continues in the future to be inclusive enough such that the proportion of non-small minority-owned businesses do not exceed 1 percent of all businesses, the Bureau believes that its adoption of an inflation-adjustment for the gross annual revenue threshold in the definition of small business under § 1002.106(b) should help ensure that, over time, the proportion of businesses covered by the rule does not decline. In any case, the Bureau will monitor data concerning the prevalence of small businesses in the context of the economy at large.

Broad criticism. Regarding the comment of a lender that it already complies with fair lending laws, the Bureau notes that continuing enforcement of fair lending laws, and tools such as this data collection rule that facilitate such enforcement, remains necessary because while the commenter may comply with fair lending laws, some lenders may not and a subset of those may repeatedly violate fair lending laws. Additionally, enabling identification of business and community development needs and opportunities is an independent purpose of the statute. Compliance with fair lending laws does not necessarily permit creditors, communities, and governmental entities to identify business and community development needs and opportunities. As to the assertion that the rule would force a choice between compliance and market exit, the Bureau's decision to increase the originations threshold from 25 to 100 transactions will mitigate any risk of such disruptions, even if slight or speculative. Regarding the comment that small business lending is more individualized and highly relationship driven, the Bureau agrees this is true for much small business lending and the final rule is crafted to acknowledge this, as discussed in the section-by-section analyses that follow. But that does not prevent small business lending data from facilitating fair lending enforcement and identifying business and community development needs and opportunities.

As to comments that quarrel with the statutory mandate and question the utility of the data in general terms, the Bureau is bound by the statute and congressional intent. Additionally, many described potentially helpful uses of the data.

Regarding the assertion that the Dodd-Frank Act was only intended to regulate larger institutions, and that smaller lenders should be exempted from the rule to avoid harming those the Act was intended to protect, the Bureau notes that while much of the Dodd-Frank Act explicitly addresses larger entities, section 1071 does not contain such limitations. Nonetheless, Bureau has made changes in the final rule in response to public comment that will have the effect of reducing compliance burden on small lenders. For example, the Bureau has raised the coverage threshold from 25 to 100 originations for purposes of determining which financial institutions must comply with the rule, provided longer compliance periods for lenders with lower volumes of small business lending, and provided for a variety of safe harbors and a good faith error provision which will provide some leeway to smaller-volume lenders. The Bureau implemented these changes in the final rule to limit its impact on institutions with lower volumes of lending to small businesses. The Bureau has also complied with the Dodd-Frank Act requirements under SBREFA and the RFA to assess and mitigate any impact on smaller financial institutions.

The Bureau addresses the effect of the rule on lending and compliance costs, in its impact analyses in parts IX and X below. Regarding the commenter that stated that the rule would not meet its purposes and would result in restricted, higher-priced credit to the very groups the proposal is meant to benefit, the Bureau's analysis suggests that any changes in the cost of credit would be small and unlikely to lead to a significant change in the per-unit cost of loans to individual applicants even from the smallest lenders. The Bureau has made various changes from the proposal in finalizing this rule intended to mitigate costs for smaller-volume lenders serving small businesses in response to comments expressing concern that credit unions and other financial institutions remain active small business lenders.

Regarding the concern that data from credit unions would not be comparable to data collected from other kinds of lenders, the Bureau observes that, under § 1002.109(b), lenders must 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.

Regarding the comment that the rule should be modified to support responsible innovation in banking without unintentionally stifling the efficiency and innovation that online lenders may provide, the Bureau agrees that it does not wish to stifle responsible innovation. The Bureau has endeavored to be responsive to these concerns in the final rule; to the extent that specific concerns were raised, they are addressed in other provisions of this preamble. Regarding the comment that the rule as proposed was too complex even for most forward-leaning, technologically adept financial institutions, the Bureau disagrees, noting that while this rule is new, it is not dissimilar to other similar data collection regulations in complexity, such as those for HMDA, CRA, and the CDFI Fund. Further, the Bureau has made a number of changes to this final rule to make compliance easier for smaller-volume lenders, or to exclude them from reporting requirements entirely.

Regarding the comment asserting that the Bureau was overreaching by regulating business loans, the Bureau notes that section 1071 explicitly requires the Bureau promulgate a rule to collect data on applications for business credit.

The role of online lenders. Regarding assertions made that nonbank online lenders were important to expanding access to financing for Black- and Hispanic-owned businesses in particular, that traditional lenders provided fewer loans to women-owned and minority-owned small businesses, and that technology improved access and outcomes for small businesses, the Bureau believes that the broader conclusion to draw from these assertions is that the data that will be collected under this rule is needed to assess and further analyze such claims.

Uniqueness of small business lending. Regarding the comment that it is not possible to perform comparative analysis on small business loans because they are unique and manually unwritten, the Bureau disagrees. Other commenters, as set out in the section-by-section analysis of § 1002.101, stated that the data points proposed in the NPRM are fulsome and can contribute to sophisticated analysis and comparison of small business loans. Regarding the comment that the Bureau cannot make comparisons absent additional credit metrics beyond those it proposed to collect and that other reviewers of published data could draw incorrect conclusions, the Bureau does not agree that additional credit metrics are necessary in order to draw meaningful analyses from the data. While the Bureau believes, all things equal, that additional data points would enrich the analysis for users of the data, the Bureau also believes that certain of these metrics can be derived, at least in part, from other data points, and it notes that other commenters varyingly opposed any data points proposed pursuant to ECOA section 704B9(e)(2)(H) or requested that the Bureau collect as few data points as possible. Industry comments were also contradictory on this point; while many commenters suggested the Bureau had proposed too many data points, commenters also asserted that the Bureau was not collecting enough data to draw proper conclusions. The Bureau believes its final rule strikes an appropriate balance between comprehensiveness and minimizing burden and complexity to financial institutions.

Data accuracy. Regarding comments that the final rule should focus on ensuring the collection and reporting of high-quality data, the Bureau agrees. To this end, it has adjusted various provisions in the final rule in response to comments received. In addition, other changes, while made for other reasons, render moot certain comments on accuracy concerns. For example, the decision not to finalize the proposed visual observation and surname requirement, discussed in the section-by-section analysis of § 1002.107(a)(19)), moots the relevance of comments about the accuracy of visual observation.

Specific uses of small business lending data. Regarding the comment that the Bureau should have explained and provided an opportunity for notice and comment for its intended uses of the data collected under this rule, the Bureau disagrees, both that it did not explain what the data would be used for, and that it is obligated to identify specific uses of the data or to provide the public an opportunity to comment on proposed specific uses of the data. Initially, section 1071 itself establishes the intended purposes and uses of the collection and publication of the data—namely, the facilitation of fair lending enforcement and the identification of business and community development needs and opportunities. Next, while section 1071 requires the Bureau to collect and publish data on small business lending applications, it does not require the Bureau to identify its intended uses of the data. Moreover, even if the Bureau articulates specific uses of the data, as the statute explicitly provides, the Bureau is not the only intended user of the data. Enforcement of fair lending laws includes ECOA, which is enforced not only by the Bureau but by many other Federal agencies. Further, for purposes of identifying business and community development needs and opportunities, the statute specifically names communities, governmental entities, and creditors as potential users of the data collected under this rule. Thus, even if the Bureau disclosed its intended uses—which could change over time depending on the data received and the needs identified—other stakeholders could make different use of the data.

Regarding comments about how the Bureau intends to make the data public, including whether and how it will make such information public, and that the Bureau should carefully consider potential unintended consequences especially related to data publication, the Bureau describes its intended privacy analysis in part VIII below. Regarding concerns that the Bureau might reduce small business credit access and chill further innovation aimed at better serving small businesses, the Bureau has considered various comments concerning access to credit and innovation, which it addresses throughout the section-by-section analyses below.

2. Comments Regarding Implementation

Comments Received

Several commenters said that the Bureau should provide additional implementation or guidance resources about the final rule, specific parts of the rule, or regarding how the rule applies in specific situations. Some of these commenters requested specific forms of guidance or specific resources, such as frequently asked questions, guides, or templates. One commenter said that the final rule should have a table of contents. Some commenters said that the Bureau should provide training on collecting and reporting data or training on how to comply with the rule generally. One commenter said the Bureau should develop a data literacy program. Another commenter said that the Bureau should use all of its available tools to educate and support lenders and their vendors, including no-action letters, advisory opinions, webinars, guides, and other materials.

Some commenters requested specific content in implementation and guidance resources. Many commenters requested additional guidance on specific requirements or data points, and those comments generally are addressed in the relevant section-by-section analyses later in this part V. Additionally, one commenter said that the Bureau should develop materials showing how to do the research needed to find appropriate regulation sections and related commentary. The same commenter said that implementation and guidance resources should provide examples. Another commenter said that implementation resources should address matters not typically addressed in supervision guides. A few other commenters said that implementation materials should be detailed and/or comprehensive.

A few commenters said that implementation materials and guidance should be provided at specific points in time. Two commenters requested that the Filing Instructions Guide be provided at least six months before data collection is required, and another commenter said that the Filing Instructions Guide should be provided early in the implementation process. This commenter also said that the compliance date should take into account the delayed availability of the Filing Instructions Guide. A different commenter said that guidance should be provided before, during, and after the compliance date.

A few commenters said that the Bureau should develop outreach programs or provide additional access to Bureau staff to address questions or issues that arise during implementation of the rule. One commenter said that the Bureau should commit to a formal request for comments on all facets of implementation and compliance with the rule. This commenter also said that the Bureau should dedicate staff to provide definitive answers to industry members that contact the Bureau and that it should not be possible for community banks to be criticized or penalized for following the instructions or answers obtained from Bureau staff. Another commenter said that, during the implementation period, the Bureau should regularly communicate with vendors and covered financial institutions and consider reasonable extensions of the rule's compliance date if issues that could affect industry preparedness arise.

Another commenter said that the Bureau should create a compliance liaison office that has the primary goal of supporting industry in their regulatory submissions and fair lending analyses. This commenter said that this liaison office would require multiple types of specialists in order to function properly and would need ties to other teams so that feedback loops work properly. This commenter further said that questions on specific data entry topics should be saved and communicated to the Office of Regulations and others at the Bureau. The commenter said that Bureau guidance provided to individual industry members should be converted into frequently asked questions and tagged for purposes of amending existing regulations. The commenter further said providing verbal guidance is helpful, but slow, and potentially inconsistent. This commenter also alleged that the Bureau does not track data related to questions received and asserted that such lack of tracking limits the responsiveness of the Bureau in adapting regulations to properly include current industry practices. A different commenter said that the Bureau should consider holding a series of public meetings or hearings to take testimony from small businesses, lenders, and trade associations regarding the impact that implementation of the proposed rule will have on each group as well as on the privacy risks inherent in the proposed data collection and public reporting by the Bureau.

Finally, there were two comments on supervision and enforcement related issues. These commenters said that the Bureau should coordinate with other Federal agencies to develop model examination procedures in advance of the Bureau publishing a final rule. One of these commenters further predicted that, absent a clear description of the methodologies that might be employed to perform fair lending analysis, there would likely be a period where prudential regulators' examination expectations are in flux and, perhaps, materially inconsistent.

Responses to Comments Received

The CFPB aims to provide a wide variety of guidance about the legislative rules it issues pursuant to the Administrative Procedure Act. Although this guidance may include materials such as advisory opinions, interpretive rules, and general statements of policy, the CFPB's guidance more often includes other materials and activities that generally reiterate requirements or positions that previously have been announced in a legislative rule or elsewhere (hereinafter “implementation resources”). These implementation resources include such documents and materials as rule summaries, compliance guides, checklists, factsheets, frequently asked questions, institutional and transactional coverage charts, webinars, and other compliance aids directed to regulated entities, the general public, or agency staff ( e.g., staff manuals). In recent years, the CFPB has developed a process for preparing and releasing these implementation resources. For rules such as this one, the CFPB generally engages in a phased approach and attempts to provide various implementation resources throughout the implementation period and for some period after the compliance date.

The CFPB has provided, simultaneously with this rule's release, a Filing Instructions Guide, an executive summary, and other resources to help financial institutions understand and comply with the final rule. These materials are available on the CFPB's website.

Additionally, the CFPB is planning to release a Small Entity Compliance Guide. This Small Entity Compliance Guide will provide a detailed and comprehensive summary of the rule's requirements, will include examples, and will be separate from and different than any examination manuals or other supervisory materials. The CFPB also anticipates providing other written implementation resources to assist industry, vendors, and others. When providing implementation resources, the CFPB will consider all of its available tools and select the tool that it believes is best suited to the content that the CFPB is addressing in the guidance as well as the timing of the guidance. Individuals who would like to be notified when the CFPB releases additional implementation resources or other guidance can sign up to receive notifications. However, with regard to one commenter's request, the CFPB does not anticipate developing materials attempting to show members of industry how to conduct research. The CFPB believes that such materials are outside the scope of the CFPB's implementation and guidance function and are regularly provided by other sources.

With regard to the comments addressing outreach, the CFPB notes that it has and anticipates that it will continue to engage in ongoing outreach related to this rulemaking. As discussed in part III above, the CFPB engaged in considerable outreach to industry and other stakeholders in the years leading up to issuing this final rule, and intends to continue to engage with industry, along with vendors and other stakeholders, as they prepare to comply with the rule. With regard to one commenter's request that the CFPB hold a series of public meetings or hearings to take testimony from small businesses, lenders, and trade associations regarding the impact that implementation of the proposed rule will have on each group prior to issuance of the final rule, the CFPB did not believe this was needed given the number of substantive comment letters it received and the opportunity provided to stakeholders to submit comments on the proposed rule and its potential impact. Nonetheless, as described in part III.B above, the CFPB has been 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 small business lending data to the CFPB. With these software vendors and technical staff, the CFPB has held and, after publication of this final rule, will continue to hold discussions concerning the technical systems and procedures the CFPB will provide for financial institutions to submit data. The CFPB expects that its outreach efforts will provide a channel of communication for industry, vendors, and other parties to constructively provide feedback on the CFPB's existing implementation resources as well as provide direction for future implementation resources.

As set out in more detail above, some commenters said that the CFPB should provide staff to address questions or issues that arise during implementation of the rule. One commenter suggested that the CFPB develop a compliance liaison office. Similar to what it has done with inquiries about HMDA/Regulation C, the CFPB anticipates that it will use its regulatory inquiries function to assist individual inquirers who have specific questions about the rule or how to submit data pursuant to the rule. This function is designed to provide inquirers with brief, informal assistance on regulatory or technical issues. However, in part because of Administrative Procedure Act constraints, the CFPB cannot provide binding or official interpretations through this informal function. In addition, there are other limits on the regulatory inquiries function and on the CFPB's other implementation resources. For example, the CFPB does not provide legal advice through the regulatory inquiries function.

In addition, the CFPB already reviews the inquiries it receives and uses information gleaned from those reviews to help the CFPB prioritize provision of various other types of guidance. Thus, when the CFPB receives multiple individual inquiries about the same topic, the CFPB often prioritizes that topic for webinars and various forms of written guidance, potentially culminating in revisions to the Official Interpretations or the regulatory text after a notice-and-comment process. Thus, as requested by one commenter, the CFPB already tracks data regarding the inquiries it receives and, as appropriate given the nature of the inquiries and the CFPB's resources, uses them as a basis for frequently asked questions, other implementation resources, or other action. The CFPB anticipates doing the same with inquiries received about this rule.

With regard to the comments related to supervision, the CFPB notes that it will coordinate with other Federal agencies to develop examination procedures in connection with the rule, and anticipates publishing such procedures in advance of the rule's first compliance date.

3. Comments Regarding Overlaps With Other Data Reporting Regimes

Comments Received

General comments. Several commenters cast the overlap between this rule and other Federal data collection rules in a positive light. A community group and a CDFI lender observed that small business lending data are collected piecemeal and haphazardly across multiple agencies—including the Federal bank agencies, the SBA, and the CDFI Fund—and that this rule could be used to consolidate small business lending data reporting across agencies to reduce administrative burden by satisfying requirements across programs for various CRA and fair lending uses.

Two commenters noted that the existence of other data collection regimes, including Federal reporting requirements and private-sector reporting (such as HMDA; the SBA 7(a), 504, and Community Advantage Loan programs; CDFI Fund reporting; the Wells Fargo Diverse Community Capital Program; and the Paycheck Protection Program) suggested that compliance with this rule is feasible because these other data collections make this rule well-understood in conceptual, technological, and procedural terms. One commenter noted that these other data collections cover all but three of the data points in the NPRM (application method, application recipient, and denial reasons).

Several commenters stated their appreciation for the Bureau's attempts to harmonize this rule with others and avoid duplicative data reporting. One bank noted that avoiding duplicative reporting was critical for community banks, for which even slight differences in reporting rules would be burdensome, taking away from time that could be spent with customers.

Many other commenters, including lenders, trade associations, a business advocacy group, and a group of State banking regulators, noted the overlap between this rule and other data collection regimes, and requested that the Bureau harmonize this rule with other similar data reporting regulations, with which lenders were familiar, to minimize challenges, complexity, duplication, potential burden on lenders, and potential errors in the data. These commenters named HMDA/Regulation C, CRA, FFIEC Call Reports, Regulation B/ECOA, and FinCEN's Beneficial Ownership Rule as specific examples of other rules that the required harmonization with this rule and that, in many cases, the Bureau itself identified as overlapping.

Commenters argued that, by borrowing from existing frameworks or systems, the Bureau could reduce complexity and facilitate industry compliance, allowing financial institutions to leverage existing processes, training and institutional knowledge. For instance, some commenters suggested that the thresholds in this rule be aligned with those of HMDA and CRA. Other commenters suggested that the Bureau could adopt the framework in FinCEN's beneficial ownership rule for this rule's method of determining minority-owned and women-owned status, rather than layering on a new definition of “primary owners,” which they suggested would add unneeded complexity to the loan origination process.

Industry commenters also asserted that by aligning this rule with existing rules, such as HMDA and CRA, the Bureau could avoid imposing inconsistent or duplicative reporting requirements to avoid errors from regulatory confusion and urged the Bureau to avoid requiring lenders to report different data for the same transaction.

Several other commenters identified other concerns with overlapping reporting. One bank noted that, while the Bureau tried to harmonize its requirements with other rules, even slight deviations between rules cause problems, which may confuse customers and make them more likely to refuse to provide data. Another bank noted that some HMDA and CRA data aggregation and submission systems rely upon identifiers to separate and process these different datasets, which the bank suggested was another reason to keep loans reportable under this rule separate from those reportable under HMDA.

A number of industry commenters and a group of State banking regulators requested that the Bureau not require financial institutions that already report data to duplicate their work. One stated that banks already report a significant amount of data to prudential regulators, and that the Bureau should eliminate duplicative reporting. Other commenters asked that the Bureau work with Federal agencies to align this rule with the FFIEC Call Report, and CRA and HMDA regulations to avoid duplication, reduce compliance burden, and reduce the potential for data errors. Two banks urged the Bureau to exempt loans reportable under other data reporting regimes, such as HMDA- and CRA-reportable loans. Another noted that its staff is trained on the established requirements of HMDA and CRA, and that removing duplicative or inconsistent requirements would reduce compliance costs, providing savings that could be passed on to the borrowers. Two community-oriented lenders suggested that the Bureau exempt all credit applications under Federal agency programs, as the data points proposed in this rule are already collected by that loan program's oversight agency ( i.e., SBA, USDA, etc.).

Two industry commenters suggested that the Bureau should first use existing small business lending data published by the government and private sector before collecting additional data, thereby assessing the small business finance market without negatively impacting providers of capital to entrepreneurs. One bank asserted that the Bureau itself admitted it had enough data to analyze the small business lending market, and that the rule should focus on collecting data from non-depository institutions, as it would be duplicative to collect data from depositories, which provide data via the FFIEC and NCUA Call Reports and already have a history of being regulated.

Some industry commenters generally requested that the Bureau work out inconsistencies between this rule and other data collection regimes. Some offered more specific requests for harmonization. One suggested more alignment in terms of scope, coverage and exemptions between this rule, HMDA and CRA. Another commenter identified inconsistencies with existing Regulation B, citing the difference between its small business definition ($1 million or less in revenue) and the NPRM's proposed definition ($5 million or less). A CDFI lender observed that CDFIs report lending activity to the CDFI Fund, SBA, CRA, Opportunity Finance Network's annual member survey, and credit reporting agencies, and requested that the Bureau standardize data formats to match those used in CDFI Fund reporting to streamline data collection and minimize burden on CDFIs.

HMDA. A number of commenters identified overlap between this rule and HMDA/Regulation C, and noted that duplicative data would published in two places. Some industry commenters requested that the Bureau avoid inconsistent and duplicative reporting by excluding from HMDA reporting transactions reportable under this rule. Two trade association suggested a parallel rulemaking to amend Regulation C, timed with the release of this final rule.

On the other hand, other commenters suggested that HMDA-reportable loans should be excluded from this rule to avoid duplicative reporting, undue compliance burden, and regulatory confusion. A business advocacy group noted that the Bureau itself identified the overlap between HMDA-reportable loans and loans covered by this rule. A trade association suggested the Bureau could narrowly tailor an exemption by apply the rule only to financial institutions that report data under HMDA, without an exclusion for HMDA-reportable loans by lenders that are not HMDA reporters, arguing that a narrowly tailored exclusion would serve the statutory purposes of the rule because commercial mortgage loans for small businesses would be captured under HMDA or this rule. A bank believed that duplicative reporting of HMDA-reportable applications did not serve the statutory purposes of the rule. A large bank disagreed with the Bureau's assertion that excluding HMDA-reportable transactions from this rule would add complexity to the analysis of data by requiring lenders to find and delete HMDA-reportable transactions from its submission to the Bureau; the bank argued that duplicative reporting was more complex. One lender stated that farm credit data are already collected from Farm Credit System lenders subject to HMDA.

A number of commenters identified, generally, inconsistencies between the proposed requirements for this rule and those of HMDA/Regulation C. Many industry commenters pointed out that many proposed data points in the NPRM would be similar to data points in Regulation C, and expressed concern that any differences in reporting requirements for these data points would lead to confusion and data errors. Two trade associations asserted that the overlap in data would create significant and needless complexities for covered lenders, and noted that there were inconsistencies between the rules despite the Bureau's attempts to limit them.

Several lenders requested that the Bureau harmonize this rule with Regulation C to the extent possible if no exemptions were possible. A large bank asked that the Bureau harmonize several data points—action taken, application date, and ethnicity, race, and sex of principal owners—because lenders would be able to collect these data just once for each small business applicant, increasing efficiency in the application process and facilitating compliance.

Some commenters addressed overlap between specific data points proposed in the NPRM and existing data point requirements under Regulation C. A number of industry commenters noted that for census tract, HMDA uses the tract where collateral is located while the Bureau proposed to use a waterfall approach of several addresses. Two lenders pointed out that HMDA does not have the firewall requirement proposed for this rule in the NPRM; one of these commenters suggested that the final rule follow the HMDA approach (no firewall) for HMDA-reportable loans.

On the reporting of ethnicity, race, and sex of principal owners, two lenders noted that this rule and HMDA offer different answer choices. One of the commenters noted that lenders would provide two separate questionnaires regarding ethnicity, race, and sex for a single loan application, which could confuse applicants and make them decline to answer either one.

Several lenders noted that the proposed visual observation and surname provision, which does not require its use to determine the sex of a principal owner, was not aligned with the visual observation and surname requirement under Regulation C, which does require its use to determine the sex of a mortgage applicant. One stated that this disparity would cause confusion and errors in data collection. Another stated that for a loan application covered by both rules, the disparity would mean complying with one rule and violating the other.

Regarding credit purpose, a bank noted that a loan to a small business to purchase, improve, or refinance an apartment building would require different information to be collected and reported under both rules.

On action taken, one bank noted a disparity between the approaches of the proposed rule (one option for “incomplete” as an action taken) and of Regulation C (two different incompleteness options—one for a loan denial and the other for file closure) that it believed would cause difficulty, despite agreeing with the proposed rule's approach. Another bank noted that the proposed rule would require collection of gross annual revenue for the past fiscal year, while Regulation C requires the income used for the credit decision.

Community Reinvestment Act. A number of commenters noted the similarities between the small business and small farm data collected under CRA and this rule and suggested eliminating duplication. One community group stated that the data for this rule should replace CRA data, noting that this rule could replace the inconsistent, duplicative and inefficient collection of small business lending data with a comprehensive database. The commenter stated that lenders and community groups both would prefer to consult with one database than to contend with two or more that are collected annually, and that this rule is likely to capture more data than the current CRA system. A bank suggested eliminating CRA reporting requirement as data collected under this rule would duplicate and surpass the CRA data points, but would not be interoperable as each rule would require different formatting, rounding, or coding. A minority business advocacy group and a joint letter from community and business advocacy groups requested that 1071 data be used for CRA examinations, just as HMDA data are. These commenters noted that current small business small farm data for CRA examinations is limited and not a good indication of whether lenders serve the most vulnerable businesses, and that the more robust dataset to be collected under this rule would be a better indicator.

One bank asked that the Bureau work with other Federal regulators to eliminate duplication with CRA data reporting, noting that CRA data already provides a good picture of lending to small business including agriculture. Another bank suggested that the Bureau, rather than create a new data collection requirement, exempt federally insured depositories and work with other Federal regulators to enrich existing CRA reporting to include the data the Bureau wants to collect under section 1071. The commenter noted that insured depositories already have robust CRA reporting systems, and generally already collect and report data required by the NPRM to meet CRA obligations. The bank stated that the use of CRA systems to report 1071 data would result in the faster delivery of information the Bureau needs at lower cost to reporters. The bank also suggested that the CFPB should focus this rule on non-depository institutions that do not now have robust reporting requirements. The commenter also stated that institutions are already comfortable with CRA reporting and understand how regulators use such information, but noted that they did not understand how data collected pursuant to section 1071 would be used and was concerned the Bureau would use it to retaliate and micromanage lenders, as it did in the consumer lending space.

A number of lenders asked that the Bureau work collaboratively with the prudential regulators to eliminate inconsistencies and duplication with CRA data reporting. A CDFI lender asserted that successful implementation of this rule would necessitate coordination of data requirements and encouraged the Bureau to coordinate with the CRA agencies to align rules to ensure that lenders covered by CRA continue to meet credit and community development needs of small businesses, particularly those owned by women and minorities. One bank noted that duplicate and inconsistent requirements would increase the compliance burden on lenders as well as data errors, and that inconsistent data reporting would require more resources without adding value. A bank stated that inconsistent definitions could cause community stakeholders to misinterpret data and draw incorrect conclusions regarding a lender's performance.

One bank supported a more streamlined approach taking advantage of existing CRA processes and definitions to reduce costs and burdens related to this rule, which in turn would ease burdens on lenders and reduce costs that would ultimately be passed on to the borrower. Another commenter suggested that the Bureau work closely with the agencies working on the modernization of CRA rules to reduce duplication and the friction caused by differences between the rules.

A number of commenters identified specific areas of inconsistency between the CRA and this rule. Several banks and a trade association noted that the small business definition proposed in the NPRM, businesses with gross annual revenue greater than $5 million, was inconsistent with the CRA definition, which included an asset threshold and originated loans less than $1 million. One bank stated that this discrepancy was likely to cause staff confusion and possible data integrity issues. A trade association requested that the Bureau adopt the CRA's small business definition using a loan size of $1 million and other Federal laws to create alignment for those lenders that already comply with existing regulations, and that a focus on businesses with $1 million in revenues would support the Bureau's goal of promoting small business lending in underserved areas to underserved small businesses, that are more likely to be closer to $1 million rather than $5 million in revenue. Two banks stated that banks may receive more CRA credit for small business loans originated to businesses with $1 million or less in gross annual revenues.

Several commenters noted that the rule proposed a waterfall approach to using addresses to determine census tract, while CRA regulations inquire only about where loan funds are used. One bank commented that this meant that a single loan could result in the reporting of different census tracts for purposes of the two rules. Another bank suggested that a better way to achieve consistency with CRA was to allow lenders reporting under this rule to choose which of the three addresses to use and require the institution to report which address type it used.

Some industry commenters noted that the Bureau reduce its gross annual revenue threshold for its small business definition under this rule from $5 million to $1 million to align with CRA. A trade association noted that the $1 million threshold would align with the threshold for FFIEC Call Reports and for existing Regulation B, which requires tracking of loans to businesses with $1 million or less in revenue for purposes of sending adverse action notices under § 1002.9(a)(3). The commenter also stated that using this threshold would also mean that other data from this rule could be compared with CRA data, leading to a better evaluation of a bank's small business lending performance.

One bank stated that a discrepancy between this rule and CRA on the revenue threshold could lead to errors, given the many manual processes still used. Another bank asserted that a $5 million threshold would capture applications from businesses it did not consider small.

Several trade associations claimed that the proposed rule did not treat renewals and extensions the way CRA regulations do.

SBA. Several commenters stated that SBA-reportable loans should be exempt from the rule, including loans under the SBA 7(a) and 504 programs. One commenter stated that the Bureau should work with SBA to select reportable data elements and then obtain them from the SBA on loans and application denials to ease the reporting burden of SBA lenders, and that the majority of applications are already captured by third-party lending partners in the 504 program.

One bank stated that the Bureau's proposed small business definition is too broad and may capture entities that are not true small businesses. The commenter originated many multi-family loans to entities formed for the sole purpose of investing in real estate, not to run a small business, and asserted that the proposed definition would capture entities not consistent with SBA's definition of small business based on number of employees by industry and would be consistent with the spirit of section 1071, and that this would skew data.

FinCEN. One bank stated that data reported under this rule would be better provided through other means, such as FinCEN's recent business database and registry.

CDFI Fund. Some commenters, including a number of community-oriented lenders and community groups, stated that the Bureau should work with the CDFI Fund to streamline integrating the data from this rule with that of the CDFI Fund. Several commenters stated that new requirements from the CDFI Fund will likely expand transaction level reporting requirements to all certified CDFIs. One CDFI lender noted that the CDFI Fund's review and improvement to its current annual reporting process could create an opportunity to harmonize its definition, types of data collection, and timing of reporting with the Bureau. Another CDFI lender stated that the Bureau should work with the CDFI Fund to ensure that reporting requirements are aligned; CDFIs are currently required by Federal law to collect, maintain, and report specific demographic data about small businesses and consumers to ensure they serve their target communities. Several others stated that the Bureau should work with the CDFI Fund and loan software providers to streamline the process of integrating new data collection processes into existing systems. Some commenters noted that certain CDFIs must report data points such as interest rate, origination, points and fees, amortization type, loan term, and payment dates to the CDFI Fund. Several also pointed out that some CDFIs also report on loans to the SBA, to Federal prudential banking regulators pursuant to the CRA, and to a non-profit's annual member survey.

One lender stated that CDFIs have long sought guidance from the Bureau on compliance with overlapping statutory requirements from the CDFI Fund, ECOA, and Regulation B, and recommended that the Bureau use this rulemaking process to clarify data collection requirements in coordination with the CDFI Fund to avoid potential conflicts.

Several commenters said that some CDFIs will have to adjust processes and systems to comply with this rule, that the CDFI industry uses several different loan software products, and providers continually modify systems to comply with the CDFI Fund's reporting requirements.

One commenter stated that the Bureau should collect credit score, as CDFI Fund does, because it permits an “apples-to-apples” comparison of loans to help determine if small businesses that have historically struggled to access responsible loans receive credit on identical terms as white-owned businesses. The commenter also said that the burden to collect this would be minimal, as many CDFIs already report it to the CDFI Fund.

Farm Credit. An agricultural lender stated that a lack of understanding of the Farm Credit System by the Bureau would have unintended and detrimental consequences for those lenders' customers. The lender noted that these lenders institutions already report lending on Young, Beginning and Small lending efforts and volume (12 CFR 614.4165) to the Farm Credit Administration.

Agency cooperation. One bank suggested that the Bureau work with SBA to create more women-owned and minority-owned business programs, such as diversity loan programs to help the underserved, noting that the Dodd-Frank Act was passed as a reaction to the practices of larger lenders but would affect smaller lenders disproportionately.

A State financial regulator requested that the Bureau work with State regulators to provide them data. The commenter noted that the NPRM proposed modifications or deletions to protect privacy interests but was silent on whether the Bureau would share unredacted data with State regulators, and urged the Bureau to include in the final rule express language permitting the Bureau to share data collected under this rule with State regulators in accordance with information sharing agreements. The commenter noted that such data will help State regulators identify fair lending violations and enforce anti-discrimination laws.

Responses to Comments Received

General comments on overlap. The CFPB acknowledges the general comments concerning the overlap between this rule and other data collection regimes, and general requests that the Bureau harmonize this rule with other similar data reporting regulations. The CFPB recognizes the overlap with other rules and in this final rule has made attempts to minimize the challenges, complexity, and duplication of effort, as well as potential errors in the data. In some instances, duplicate reporting will be eliminated—this rule will not require the reporting of any HMDA-reportable applications, and proposed amendments to CRA regulations would eliminate reporting on small business and small farm reporting to be replaced exclusively by data from this rule. In addition, the CFPB attempted wherever possible ( i.e., consistent with its statutory authorities under this rule) to borrow concepts or structures from other rules, such as FinCEN's customer due diligence rule. The CFPB also intends to continue to coordinate with other agencies to further harmonize this final rule with other similar regulations.

Regarding the requests that the Bureau not require financial institutions that already report data to duplicate their work, or that the Bureau exempt all loan applications under Federal agency programs, the CFPB has made certain adjustments in the final rule. As noted above, duplicate reporting will be eliminated for HMDA-reportable loans and, pursuant to proposed amendments to CRA regulations, under the CRA. However, other data reporting regulations have purposes sufficiently different from those of this rule such that the regulations are not completely overlapping, and that the simple elimination of one of the two reporting requirements would not advance both regulations. For instance, data reported via FFIEC Call Reports are not motivated only by considerations of fair lending and community development. In addition, such other reporting requirements address only originations, while section 1071 requires reporting on applications.

Regarding the comment that the Bureau should first use existing small business lending data generated by the government and private sector before collecting additional data, Congress disagreed when it passed section 1071 calling for data on small business lending applications. Existing data capture only limited application-level data on lending to small businesses by depository institutions, and hardly any application-level data on lending to small businesses by non-depository institutions.

Regarding requests that the CFPB work out inconsistencies between this rule and other data collection regimes, and that the Bureau standardize data formats to match those used in other data reporting, especially for CDFIs, the CFPB has attempted to do so in this final rule where consistent with section 1071's statutory purposes. In addition, the CFPB intends to work with agencies and other sources of small business lending data to explore other possible avenues for additional standardization.

HMDA. Regarding the identification of overlap between this rule and HMDA/Regulation C, and the requests to avoid duplicative reporting, the CFPB is exempting HMDA-reportable transactions from the requirements of this rule. This new provision would have the effect of eliminating inconsistencies between the two rules, the duplication of data collection and reporting, and potential data errors. However, the Bureau is not adopting a more narrowly tailored exclusion that would not apply to HMDA-reportable loans by financial institutions that are not HMDA reporters. For the reasons set out in the section-by-section analysis of § 1002.104(b)(2), the CFPB has determined that trying to close all potential data gaps would defeat the purpose of trying to alleviate concerns from commenters about having to implement and maintain two separate reporting systems. The CFPB's decision to exempt HMDA-reportable transactions also renders moot comments concerning inconsistencies between specific data points in Regulation C and those proposed for this rule, along with the firewall requirement.

Community Reinvestment Act. Regarding the comments identifying the similarities between the data required by this rule and the requirements of the CRA, and the request that the data of this rule replace the data for the CRA, the CFPB notes that, as stated in part II.F.2.i above, the CRA agencies have issued a proposed rule that, amongst other things, would exclusively rely on 1071 data for its assessment of the small business and small farm lending activities of banks, replacing the existing CRA data requirements based on Call Reports and other sources. The CFPB believes that when the final rule amending the CRA requirements is issued, duplication between the CRA and this rule will be eliminated, as requested by numerous commenters, including industry and community groups. As some community groups suggested, the CRA proposal contemplates using 1071 data for CRA examinations in the manner that HMDA data are currently used in CRA examinations. The CFPB agrees with these commenters that 1071 data would be more robust than the data currently collected under existing CRA rules.

Regarding the various request that the Bureau work with other Federal regulators to eliminate duplication, the CFPB observes that the CRA agencies appear to intend with their proposed rule to eliminate duplicative reporting by both relying on the Bureau's small business lending data and eliminating any independent data collection requirement. The CFPB intends to continue cooperating with the CRA agencies to ensure coordination between this rule and amendments to the CRA regulations, especially those concerning potentially duplicative reporting.

Regarding the comments that the Bureau should exempt lenders that report under the CRA, the CFPB does not believe such an exemption would be appropriate. In addition, in light of the CRA's proposal to use data collected and reported pursuant to section 1071, the result of such an exemption might be that no small business lending data would be collected for such institutions.

Regarding the comments that identified specific inconsistencies between the CRA and this rule, the CFPB does not disagree that the inconsistencies identified exist but notes that the CRA's proposal that the CRA agencies rely exclusively on 1071 data for their analysis of small business and small farm lending would render these inconsistencies moot because only 1071 data would exist. Regarding the comment that the Bureau should reduce its gross annual revenue threshold for its small business definition under this rule from $5 million to $1 million to align with FFIEC Call Reports and for Regulation B, the CFPB is not doing so for the reasons set out in the section-by-section analysis of § 1002.106(b). The CFPB believes that a small business definition with a lower threshold would not further the statutory purposes of the rule because it would reduce the amount of data collected concerning lending to many businesses that, according to other metrics would still be considered small though above $1 million in revenue. In addition, the Bureau believes that analyses seeking to match or compare data from this rule that are interoperable with small business lending data from FFIEC need only screen this rule's data for gross annual revenue of less than $1 million, which this rule requires as a data point. For instance, the CRA NPRM proposes screening the 1071 data for loans to small businesses and small farms under $1 million revenue for purposes of certain parts of CRA examinations.

SBA. The CFPB is not exempting SBA-guaranteed loans from reporting under this rule. For its 7(a) and 504 programs, the SBA only collects and publishes a subset of the data required by this rule for originations. Still, the CFPB intends to coordinate with SBA to try to reduce duplicative reporting.

FinCEN. Regarding the comment that the data reported under this rule would be better provided through other means, such as via FinCEN's recent business database and registry, the CFPB understands that database is not set up to receive small business lending data.

CDFI Fund. Regarding comments that the Bureau should work with the CDFI Fund to harmonize reporting under the CDFI Fund's Transaction Level Report requirements with this rule, the CFPB agrees to coordinate with the CDFI Fund to determine where it is possible to avoid duplicative or inconsistent reporting of data and how to resolve any overlapping statutory requirements. The CFPB observes that it may not be possible to simply eliminate duplicate reporting, as with HMDA or CRA reporting, given the differences in purposes and the requirements of the CDFI Fund compared to those of this rule. Regarding comments that the Bureau should work with loan software providers, the CFPB agrees and intends to meet with software providers as it develops the small business lending data submission platform to determine how reporting can be streamlined for CDFIs that must report small business lending data to various agencies, such as the CFPB under this rule, the SBA, and the CDFI Fund.

Regarding the comment that the Bureau should collect credit score, as CDFI Fund does, the CFPB notes that, as stated in the section-by-section analysis of § 1002.107(a), the CFPB believes that this data point—which the CFPB would also have to collect from other financial institutions that may have operations quite different from CDFIs—could be quite complicated and involve complex sub-fields, which could pose operational difficulties for financial institutions in collecting and reporting this information.

Farm Credit. Regarding the comments that the Bureau's lack of understanding of the Farm Credit System would have unintended and detrimental consequences for FCS customers, and that the FCS lenders already report data to the Farm Credit Administration, the CFPB has consulted with FCS lenders, and believes that its approach will result in consistency across the data collected under this rule, more robust fair lending analyses and transparency into opportunities for small farms, and a more even playing field for compliance across all financial institutions.

Agency cooperation. Regarding the comment that the Bureau work with SBA to create more women-owned and minority-owned business programs, the CFPB regularly engages with other Federal regulators on a range of work that implicates its statutory mission; that includes, as appropriate, the SBA. Regarding the request that the Bureau provide small business lending data to State regulators, the CFPB agrees that doing so would likely be consistent with the statutory purposes of the rule. The CFPB will engage with State and Federal regulators regarding their access to small business lending data collected under this final rule, while ensuring that data security and data privacy are appropriately protected.

E. Cross-Cutting Interpretive Issues

1. The Bureau's Approach to Non-Small Women-Owned and Minority-Owned Businesses in This Rulemaking

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. . . .” As explained below, the Bureau proposed to require financial institutions to collect and report data regarding applications for credit for small businesses; the Bureau did not, however, propose to require financial institutions to collect and report data with respect to applicants that are not small businesses.

The Bureau believed that section 1071 was ambiguous with respect to its coverage of applications for credit for non-small women- or minority-owned businesses, and the Bureau therefore proposed to interpret this ambiguity pursuant to ECOA section 704B(g)(1). The Bureau acknowledged 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 believed that the statute's coverage of, and Congress's intent with respect to, data regarding non-small businesses was ambiguous. The Bureau proposed this approach as an interpretation of the statute pursuant to its authority under 704B(g)(1), and, in the alternative, pursuant to both 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 sought 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.

Several commenters, including industry and community groups, supported limiting the scope of data collection as the Bureau proposed. In particular, a cross-sector group of lenders, community groups, and small business advocates stated that the Bureau had taken a reasonable and adequately comprehensive approach in proposing to include only minority- and women-owned businesses that are “small,” as this would cover 99.9 percent of all minority- and women-owned businesses. The group further noted that the Bureau should continue to monitor the U.S. Census Bureau's Annual Business Survey and adjust this requirement if minority- or women-owned businesses that are not considered “small” exceed 1 percent. In contrast, a State financial regulator commented that data collection on non-small women- or minority-owned businesses was important for fair lending enforcement purposes and would provide for better consistency with States pursuing similar information collection requirements. In response to the latter comment, the Bureau notes that such data collection would be of limited utility in light of section 1071's statutory purposes because, as discussed below, the lack of a control group ( i.e., data on non-small businesses that are neither women-owned nor minority-owned) would limit such data's utility for fair lending enforcement purposes. For the reasons set forth herein, the Bureau is finalizing the approach to non-small women-owned and minority-owned businesses as proposed.

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 section 1071's 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. 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. 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 business 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 section 1071's data collection and reporting requirements apply to an applicant 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 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 applies its expertise to interpreting the language and structure of section 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 minority-owned business status as well as the ethnicity, race, and sex 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 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.

A requirement to collect and report 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. Indeed, as a cross-sector group of lenders, community groups, and small business advocates highlighted, approximately 99.9 percent of women- and minority-owned business are small. In addition, financing for large businesses can be much more varied and complex than are the products used for small business lending The Bureau will continue to observe the market on this issue.

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 statutory 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 are not women- or minority-owned. Therefore, the resulting dataset 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.

Finally, the Bureau notes that the title of section 1071 is “Small Business Data Collection,” and section 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.

For these reasons, the Bureau interprets 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 clarifying 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 an applicant's LGBTQI+-owned business status, along with the ethnicity, race, and sex 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; in the alternative, the Bureau exercises its exception authority in 704B(g)(2) to effectuate 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,” in the alternative the Bureau exercises its implied de minimis authority to create this exception.

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).” 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).”

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). 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 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 § 1002.107(a)(18) (women-owned and minority-owned business statuses, along with the new LGBTQI+-owned business status), and (a)(19) (ethnicity, race, and sex of principal owners). Each of these data points requests protected 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 is reasonable to apply section 1071's special-protection provisions only to this information, regardless of whether the statutory authority to collect it originates in 704B(b)(1) (women-owned and minority-owned business statuses), 704B(e)(2)(H) (LGBTQI+-owned business status), or 704B(e)(2)(G) (ethnicity, race, and sex 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 and other purposes.

The Bureau implements these interpretations of “information requested pursuant to subsection (b),” and any relevant comments received, in several different section-by-section analyses. With respect to ECOA section 704B(e), the Bureau discusses its interpretation of the phrase in the section-by-section analysis of § 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 § 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 § 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 deems subject to the right to refuse: § 1002.107(a)(18) (women-owned, minority-owned, and LGBTQI+-owned business statuses) and (19) (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 did the Bureau otherwise include 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.

The Bureau's definition of small business in final § 1002.106, which is based on an applicant's gross annual revenue, renders redundant any requirement that financial institutions collect a standalone data point whose sole purpose is to state whether an applicant is a small business. Indeed, under the 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 is 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 interprets 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 data collection occurs at all, as well as with the collection of gross annual revenue.

The Bureau sought 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. The Bureau received no comments on this issue.

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 § 1002.5(b).

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 is exercising its exception authority in 704B(g)(2) to effectuate this outcome. 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,” in the alternative, the Bureau exercises its implied de minimis authority to create this exception.

F. Conforming Amendments to Existing Regulation B

As discussed above, the Bureau is implementing section 1071 in a new subpart B of Regulation B. The content of existing Regulation B is becoming subpart A of Regulation B. This change does 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.

The Bureau sought comment on whether it should instead codify its rule to implement section 1071 as a free-standing regulation with its own CFR part and, if so, why. A bank commenter supported the location of this rule within a new subpart B to Regulation B, noting that lenders often overlook that Regulation B applies to business as well as consumer credit. The commenter also noted that the intent of section 1071, to provide all credit applicants fair and equitable treatment and credit, makes Regulation B the natural place for this rule, rather than a free-standing regulation, which would generate unnecessary confusion.

As noted above and as discussed in more detail below, the Bureau is amending existing § 1002.5(a)(4) and commentary for existing § 1002.5(a)(2) and (4) to expressly permit under certain circumstances voluntary collection of minority-owned, women-owned, and LGBTQI+-owned business status, and the ethnicity, race, and sex of applicants' principal owners in accordance with the requirements of subpart B.

In addition, the Bureau is 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 is likewise adding additional specificity in certain provisions in existing Regulation B to avoid confusion. The Bureau does not intend to make any substantive changes with these revisions, but rather intends to maintain the status quo. The Bureau is making the following changes:

In § 1002.1(a), regarding authority and scope, the Bureau is changing two references to “part” to instead refer to “subpart,” regarding the application of what is now subpart A to creditors.

In § 1002.2, regarding definitions, the introductory text states that definitions contained therein apply to Regulation B, unless the context indicates otherwise. The Bureau is adding “or as otherwise defined in subpart B” for clarity.

In § 1002.12(b)(1) introductory text, (b)(2) introductory text, (b)(3) through (5) and (7), regarding record retention, the Bureau is adding “or as otherwise provided in subpart B” to indicate that subpart B may provide different record retention requirements than what is set forth in those paragraphs for business credit. The Bureau is also changing a reference to “this rule” in comment 12(b)(7)–1 to instead refer to existing § 1002.12(b)(7) regarding retention of prescreened credit solicitations, to avoid confusion with subpart B's treatment of solicitations.

Finally, § 1002.13 addresses information for monitoring purposes for credit secured by an applicant's dwelling. The Bureau is revising comment 13(b)–5, which addresses applications made through unaffiliated loan shopping services, to refer to subpart A of Regulation B instead of the entirety of Regulation B, for clarity. The existing comment also refers to applications received by creditors subject to HMDA and associated data collection requirements; the Bureau is also adding to the end of the comment an additional sentence noting that creditors that are covered financial institutions under subpart B of this regulation may also be required to collect, report, and maintain certain data, as set forth in subpart B of Regulation B.

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 characteristics—race, color, religion, national origin, sex, marital status, or age. 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. Regulation B, in existing § 1002.5(b), generally prohibits a creditor from inquiring about certain protected demographic information in connection with a credit transaction. Existing § 1002.5(a)(2), however, expressly permits collection of such otherwise prohibited information if required by a regulation, order, or agreement to monitor or enforce compliance with Regulation B, ECOA, or other Federal or State law or regulation.

In 2017, the Bureau amended Regulation B, adding § 1002.5(a)(4) to expressly permit 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. 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 collection and reporting of protected demographic data for financial institutions that are not required to report certain data under section 1071.

During the SBREFA process, some small entity representatives, primarily small CDFIs and mission-oriented community banks, stated that they would be inclined to collect and report small business lending data to the Bureau even if not required to do so, such as if they fell under loan-volume thresholds. These small entity representatives expressed an intent to report data even if not required to out of a belief in the importance and utility of these data.

Proposed Rule

The Bureau proposed to amend existing § 1002.5(a)(4) to add three provisions (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 applicants' protected demographic information under certain circumstances. The Bureau also proposed 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 have permitted a previously covered financial institution to collect demographic information pursuant to subpart B 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.

Proposed § 1002.5(a)(4)(viii) would have provided that a creditor in its first year of exceeding the covered financial institution loan-threshold in § 1002.105(b) may, in the second year collect demographic information pursuant to subpart B for covered applications, provided that it does so in accordance with the relevant requirements of proposed subpart B.

Proposed § 1002.5(a)(4)(ix) would have permitted a financial institution not covered by the rule that wishes to voluntarily report small business lending data to collect applicants' protected demographic information without violating 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 also be required to report it to the Bureau.

Existing comment 5(a)(4)–1 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 proposed revising 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 have explained 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 a minority-owned business or a women-owned business as defined in proposed § 1002.102(m) and (s), respectively. The Bureau proposed this comment for parity with existing comment 5(a)(2)–2, which addresses the requirement to collect and report information about the ethnicity, race, 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 sought comment on its three proposed provisions to be added to existing § 1002.5(a)(4), and associated commentary, including whether there were other specific situations to add to the list of provisions in § 1002.5(a)(4) to permit the collection of applicants' protected demographic information pursuant to section 1071, and whether any similar modifications to other provisions were necessary. In particular, the Bureau sought comment on whether it should add another provision to § 1002.5(a)(4) relating to proposed § 1002.114(c)(1), wherein the Bureau proposed to permit financial institutions to collect, but would not require them to report, applicants' protected demographic information prior to the compliance date.

Comments Received

The Bureau received comments on this provision from several industry commenters, a business advocacy group, and a community group. The community group supported the reasoning and approach of the proposed provisions. The commenter inquired whether the provisions would allow for voluntary reporting of only the protected demographic data, or all data points, noting that if the Bureau intended only to permit voluntary data collection of demographic information that it would not make sense to permit publication of these data points, and that the usefulness of such incomplete data would be limited. A business advocacy group applauded the Bureau for the proposed provisions and recommended that the Bureau add incentives for voluntary disclosure of data for those financial institutions, but asked that the incentives not distort the purposes of the regulation by encouraging lenders to report inaccurate or untrue data to reap the benefits of the incentive to report.

A community group commented that the Bureau should permit voluntary collection not only by financial institutions not covered by the rule, but also should permit covered financial institutions to collect data on consumer credit used to fund small businesses.

Two agricultural lenders requested that the Bureau exempt Farm Credit System (FCS) lenders entirely from coverage under the rule while also adding a provision to the proposed voluntary reporting provisions stating that FCS lenders may submit a supplemental voluntary collection of data that is not otherwise already being provided to the public.

Final Rule

For the reasons set forth herein, the Bureau is finalizing amendments to existing § 1002.5(a)(4) introductory text and three provisions (in final § 1002.5(a)(4)(vii), (viii), and (ix)) that 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 adopting new § 1002.5(a)(4)(x) to similarly address information collected about multiple co-applicants. The Bureau is finalizing comment 5(a)(2)–4 along with its revision to existing comment 5(a)(4)–1 providing guidance on these new exemptions. The Bureau is additionally revising existing comment 5(a)(2)–3, as discussed below. These provisions contain updated cross-references to other sections in the final regulatory text and commentary, as well as addition of LGBTQI+-owned business status to accompany references to women- and minority-owned business statuses.

Final § 1002.5(a)(4)(vii) provides that a creditor that was required to report small business lending data pursuant to final § 1002.109 for any of the preceding five calendar years but is not currently a covered financial institution under final § 1002.105(b) may collect protected demographic information pursuant to subpart B for covered applications from small businesses as defined in final §§ 1002.103 and 1002.106(b) if it complies with the requirements of subpart B as otherwise required for covered financial institutions pursuant to final §§ 1002.107(a)(18) and (19), 1002.108, 1002.111, and 1002.112 for those applications. Final § 1002.5(a)(4)(vii) also states that such a creditor is permitted, but not required, to report data to the Bureau collected pursuant to subpart B if it complies with the requirements of subpart B as otherwise required for covered financial institutions pursuant to §§ 1002.109 and 1002.110.

The Bureau anticipates that some creditors that are no longer covered financial institutions and thus no longer required to report 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, 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 small business lending data in the near future but not so long as to permit it to collect such information in a period too attenuated from previous reporting.

Final § 1002.5(a)(4)(viii) provides a creditor that exceeded the loan-volume threshold in the first year of the two-year threshold period provided in final § 1002.105(b) may, in the second year, collect protected demographic information pursuant to subpart B for covered applications from small businesses as defined in final §§ 1002.103 and 1002.106(b) if it complies with the requirements of subpart B as otherwise required for covered financial institutions pursuant to final §§ 1002.107(a)(18) and (19), 1002.108, 1002.111, and 1002.112 for that application. Final § 1002.5(a)(4)(viii) also states that such a creditor is permitted, but not required, to report data to the Bureau collected pursuant to subpart B if it complies with the requirements of subpart B as otherwise required for covered financial institutions pursuant to §§ 1002.109 and 1002.110. The Bureau believes that this provision will benefit creditors when the creditor has not previously reported small business lending 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 final § 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 subpart B in the following calendar year (third calendar year).

Final § 1002.5(a)(4)(ix) provides that a creditor that is not currently a covered financial institution under final § 1002.105(b), and is not otherwise a creditor to which final § 1002.5(a)(4)(vii) or (viii) applies, may collect protected demographic information pursuant to subpart B for covered applications from small businesses as defined in final §§ 1002.103 and 1002.106(b) for a transaction if it complies with the requirements of subpart B as otherwise required for covered financial institutions pursuant to final §§ 1002.107 through 1002.112 for that application. Voluntarily reported data pursuant to final § 1002.5(a)(4)(ix) may add some information that otherwise would not be collected and reported, and which would further both the statutory purposes of section 1071 without requiring reporting from very low-volume financial institutions that may find it difficult or costly to report data.

The Bureau is finalizing § 1002.5(a)(4)(ix) in response to feedback from some small entity representatives and other stakeholders at SBREFA, as well as several NPRM commenters, that indicated lenders might want to collect and report small business lending data even if they were not required to do so.

New § 1002.5(a)(4)(x) provides that a creditor that is collecting information pursuant to subpart B or as described in §§ 1002.5(a)(4)(vii) through (ix) for covered applications from small businesses as defined in §§ 1002.103 and 1002.106(b) regarding whether an applicant for a covered credit transaction is a minority-owned business, a women-owned business, or an LGBTQI+-owned business, and the ethnicity, race, and sex of the applicant's principal owners may also collect that same information for any co-applicants provided that it also complies with the relevant requirements of subpart B of this part or as described in paragraphs (a)(4)(vii) through (ix) of this section with respect to those co-applicants.

The Bureau is adding § 1002.5(a)(4)(x) to permit creditors to collect information pursuant to subpart B regarding co-applicants for a covered application for a small business. Existing § 1002.5(a)(4) does not explicitly address whether creditors have permission to collect demographic information for co-applicants for a covered application for a small business, and the Bureau implements new § 1002.5(a)(4)(x) to remove any doubt that creditors that are permitted to collection information pursuant to subpart B on an applicant for covered applications for a small business pursuant to §§ 1002.5(a)(4)(vii) through (ix) is also permitted to collect such information for co-applicants as well, even if the financial institution will only report information regarding a single designated applicant per new comment 103(a)–10. As described below, final comment 103(a)–10 provides that if a covered financial institution receives a covered application from multiple businesses that are not affiliates, it shall compile, maintain, and report data for only a single applicant that is a small business. The Bureau believes that it may be easier and more efficient for financial institutions to request the same information of all co-applicants—new § 1002.5(a)(4)(x) will enable financial institutions to collect small business lending data from unreported co-applicants without violating ECOA and Regulation B's general prohibition against collecting protected demographic information.

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, and for § 1002.5(a)(4)(ix) report, protected demographic information in the manner set out in § 1002.5(a)(4)(vii) through (x). These provisions will effectuate the purposes of and facilitate compliance with ECOA and is necessary to carry out, enforce, and compile data pursuant to section 1071. Section 1002.5(a)(4)(vii) will permit creditors to collect information without interruption from year to year, thereby facilitating compliance with the rule's data collection requirements and improving the quality and reliability of the data collected. Section 1002.5(a)(4)(viii) improves the quality and reliability of the data collected by financial institutions that may be transitioning into being required to collect and report 1071 data, and will provide a creditor assurance of compliance with existing § 1002.5 regardless of whether it actually becomes subject to subpart B reporting at the end of the two-year threshold period. Section 1002.5(a)(4)(ix) will potentially increase the collection of additional information and amount of data available for analysis, thereby advancing the purposes of section 1071. Finally, § 1002.5(a)(4)(x) will permit collection of demographic information for co-applicants, thereby reducing operational complexity to allow creditors to focus on data quality and reliability. The Bureau also believes that these provisions are narrowly tailored and preserves and respects the general limitations in existing § 1002.5(b) through (d).

The Bureau is also revising existing comment 5(a)(2)–3, which 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 stated its belief in the NPRM that the reference to “another Federal statute or regulation” adequately encompassed section 1071 and subpart B, and thus did not propose to amend this existing comment. However, upon further reflection, the Bureau has determined to revise the provision specifically to reference subpart B for the sake of further clarity and the avoidance of doubt that loan brokers and other persons collecting applicants' protected demographic information on behalf of covered financial institutions pursuant to this final rule are not violating ECOA or Regulation B by doing so. The Bureau believes that it is an appropriate use of its general authority under ECOA sections 703(a) and 704B(g)(1) to permit such persons to collect protected demographic information on behalf of covered financial institutions, as such collection will effectuate the purposes of and facilitate compliance with ECOA and is necessary to carry out, enforce, and compile data pursuant to section 1071.

The Bureau is finalizing comment 5(a)(2)–4, which defines the phrase “information required by subpart B,” with revisions to add cross-references to LGBTQI+-owned businesses, as defined in § 1002.102( l). Final comment 5(a)(2)–4 addresses the requirement under this final rule that creditors that are covered financial institutions as defined in § 1002.105(a) 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 a minority-owned business, a women-owned business, or an LGBTQI+-owned business, as defined in § 1002.102(m), (s), and ( l), respectively. The Bureau is finalizing this comment for parity with existing comment 5(a)(2)–2, which addresses the requirement to collect and report information about the ethnicity, race, and sex of applicants under HMDA. The Bureau believes that it is an appropriate use of its general authority under ECOA sections 703(a) and 704B(g)(1) to specify the meaning of “information required by subpart B,” by adding comment 5(a)(2)–4 and that the clarity and certainty this provision adds will effectuate the purposes of and facilitates compliance with ECOA and is necessary to carry out, enforce, and compile data pursuant to section 1071.

Finally, the Bureau is finalizing its revisions to existing comment 5(a)(4)–1 as proposed. The existing comment establishes recordkeeping requirements for ethnicity, race, and sex information that is voluntarily collected for HMDA under the existing provisions of § 1002.5(a)(4). The revisions to comment 5(a)(4)–1 likewise provide that protected demographic information that is not required to be collected pursuant to subpart B may nevertheless be collected under the circumstances set forth in § 1002.5(a)(4) without violating existing § 1002.5(b), and that the information collected pursuant to this final rule must be retained pursuant to the requirements set forth in final § 1002.111. The Bureau is revising this comment to provide for parity between this final rule and existing references to voluntary collection of data pursuant to HMDA. The Bureau believes that these revisions are an appropriate use of its general authority under ECOA sections 703(a) and 704B(g)(1) as these revisions provide clarity and certainty to financial institutions in their voluntary collection of applicants' protected demographic information. Such clarity and certainty effectuate the purposes of and facilitates compliance with ECOA and these revisions are necessary to carry out, enforce, and compile data pursuant to section 1071.

Regarding a commenter's request to clarify whether these amendments permit voluntary reporting only as to data points concerning protected demographic data, the Bureau observes that nothing prohibits creditors from collecting any of the information set forth in final § 1002.107, other than the protected demographic information in § 1002.107(a)(18) and (19). Creditors that choose to collect protected demographic information pursuant to final § 1002.5(a)(4)(ix) must comply with § 1002.109 (along with other specified provisions), which means that they must collect and report all the required data specified in final § 1002.107.

The Bureau is not adding incentives for voluntary disclosure of data for creditors that are not covered financial institutions, as suggested by one commenter. It appears, based on SBREFA and NPRM comments, that some creditors already have an incentive to collect and report small business lending data pursuant to section 1071 even if they are not covered financial institutions under the rule; it is unclear what additional incentives the Bureau could offer to encourage other creditors to do the same. Regarding ensuring that reported data are not distorted, however, the Bureau notes that voluntary reporters must identify themselves as such pursuant to final § 1002.109(b)(10) and, a creditor voluntarily collecting and reporting data pursuant to final § 1002.5(a)(4)(ix) must do so in compliance with §§ 1002.107 through 1002.112 and 1002.114.

Regarding the comment that the visual observation and surname requirement would cause certain covered institutions to violate the prohibition in 12 CFR 202.5(b) from inquiring about the race, color, religion, national origin, or sex of an applicant or any other person in connection with a credit transaction, the Bureau notes that the concern is moot because the Bureau is not finalizing its proposed provisions for collecting principal owners' ethnicity and race via visual observation or surname in certain circumstances. (See the section-by-section analysis of § 1002.107(a)(19) for a detailed discussion of this change.) In any case, a creditor is permitted to make such inquiries under existing § 1002.5(a)(2), given that the provision permits the collection of demographic information when required to do so by another law or regulation (which includes this rule).

The Bureau addresses potential voluntary collection and reporting of data regarding non-covered products, including consumer-designated credit used for small business purposes, in the section-by-section analysis of § 1002.104(b) below. Based on its determination not to permit voluntary collection of data for such non-covered products, the Bureau is not adding an additional provision to § 1002.5(a)(4) to address such collection.

As discussed in the section-by-section analyses of §§ 1002.104(a) and 1002.105(b), the Bureau is not excluding agricultural lending or FCS lenders from coverage under this final rule. The commenter's request to permit supplemental voluntary collection and reporting of data by exempt FCS lenders if such data are not otherwise already being provided to the public is thus moot. Of course, any FCS lenders that are not covered financial institutions could nonetheless voluntarily collect and report data pursuant to final § 1002.5(a)(4)(ix).

Subpart B—Small Business Lending Data Collection

Section 1002.101 Authority, Purpose, and Scope

Proposed § 1002.101 would have set forth the authority, purpose, and scope for proposed subpart B. The Bureau sought comment on its proposed approach to this section, including whether any other information on the rule's authority, purpose, or scope should be addressed herein.

The Bureau did not receive any comments specifically regarding its recitation of the authority, purpose, and scope of subpart B. Comments addressing the authority, purpose, and scope of section 1071 and this final rule as a general matter are addressed in D.1 in the Overview to this part V above.

The Bureau is finalizing § 1002.101 as proposed. Final § 1002.101(a) provides that subpart B is issued by the Bureau pursuant to section 704B of ECOA (15 U.S.C. 1691c–2), and states that, except as otherwise provided therein, subpart B 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 Dodd-Frank Act. Final § 1002.101(b) sets 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.

Section 1002.102 Definitions

The Bureau is finalizing a number of definitions for terms used in subpart B, in § 1002.102. These definitions generally fall into several categories. First, some definitions in final § 1002.102 refer to terms defined elsewhere in subpart B—specifically, the terms business, covered application, covered credit transaction, covered financial institution, financial institution, and small business are defined in final §§ 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 subpart B, and the Bureau is defining them in separate sections, rather than in § 1002.102, for ease of reading.

Second, some terms in final § 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 § 1002.2(g), (j), and (aa), respectively. Similarly, a portion of the small business and affiliate definitions refer to the SBA's regulation at 13 CFR 121.103. These terms are each used in 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 final § 1002.102. These include applicant, closed-end credit transaction, LGBTQI+ individual, LGBTQI+-owned business, 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 rule's definitions on previously defined terms (whether in Regulation B or regulations promulgated by another agency), to the extent possible, will minimize regulatory uncertainty and facilitate compliance, particularly where the other regulations are likely to apply to the same transactions. As discussed further below, in certain instances, the Bureau is deviating from the existing definitions for purposes of this rule.

These definitions are each discussed in detail below. The Bureau is finalizing these definitions 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 addition, the Bureau is finalizing 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 finalize certain definitions are discussed in the section-by-section analyses of those specific definitions.

102(a) Affiliate

Proposed Rule

The Bureau proposed § 1002.102(a) to define “affiliate” based on whether the term is used to refer to a financial institution or to an applicant.

Proposed § 1002.102(a) would have defined “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. Existing Regulation B does not define affiliate. This proposed definition would have provided 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.

Proposed § 1002.102(a) would have defined “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?” The proposed definition would have provided consistency with the Bureau's proposed approach to what constitutes a small business for purposes of section 1071 in proposed § 1002.106(b). Proposed § 1002.107(a)(14) would have permitted, but not required, a financial institution to report the gross annual revenue for the applicant in a manner that includes the revenue of affiliates as well. In proposed § 1002.107(a)(16), workers for affiliates of the applicant would be counted in certain circumstances for the number of workers data point.

The Bureau sought comment on its proposed approach to this definition.

Comments Received

Several industry commenters provided feedback on the Bureau's proposed definition of “affiliate.” A joint letter from several trade associations asked the Bureau to provide clarification on how the definition of “affiliate” applies in the context of commercial real estate lending. Two other commenters objected to the Bureau's proposed reference to the SBA definition to determine affiliate of a small business because it can be changed by the SBA and the commenters recommended that the Bureau simplify the definition.

The Bureau did not receive comments on the proposed definition of “affiliate” with respect to a financial institution.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.102(a) as proposed. The Bureau believes it is appropriate to define “affiliate” with respect to financial institutions to be consistent with the approach in the Bureau's Regulation C, and received no comments suggesting it should do otherwise. The consistency with an existing regulatory definition may help provide clarity for financial institutions when determining their responsibilities under this final rule.

Regarding commenters' suggestions to simplify the definition of “affiliate,” the Bureau does not believe it would be appropriate to deviate from the SBA's definition for determining who is an affiliate with respect to a business or an applicant. 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. Consistent with the statute, the Bureau's definitions of business and small business in final § 1002.106 refer to definitions in the SBA's regulations, of which the SBA's definition of affiliate in 13 CFR 121.103 is a part. The Bureau believes that defining “affiliate” in this manner is appropriate and necessary to maintain consistency with the SBA's definitions. In addition, the Bureau believes that using a commonly known existing regulatory definition will facilitate compliance with reporting obligations under this final rule. Finally, the Bureau believes the SBA's definition of affiliate is sufficiently broad to afford financial institutions flexibility in the small business size determination process, as discussed below in the section-by-section analysis of § 1002.106(b).

The Bureau addresses the comment regarding how the definition of “affiliate” applies in the context of commercial real estate lending in the section-by-section analysis of § 1002.106(b)(1) below.

102(b) Applicant

Proposed § 1002.102(b) would have defined “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) was based on the definition of applicant in existing Regulation B, though for consistency with other parts of the proposed rule, it added a limitation that the credit be business credit and uses the term financial institution instead of creditor. It also omitted 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 acknowledged 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. The Bureau believed that collecting such information on guarantors, sureties, endorsers, and similar parties would likely not support section 1071's business and community development purpose.

The Bureau sought comment on its proposed approach to this definition and received one comment in response. The commenter requested that the Bureau clarify that loans jointly made to multiple borrowers, where one or more of the borrowers may qualify as a small business under the rule but are not the primary business(es) seeking the funding, are not subject to the reporting requirements.

For the reasons discussed herein, the Bureau is finalizing § 1002.102(b) as proposed. The Bureau believes it is appropriate to base the definition of applicant for purposes of new subpart B on the definition of applicant in existing Regulation B, with the limitation that the credit be business credit and using the term financial institution instead of creditor. The Bureau likewise believes that it is appropriate to limit the definition of applicant in subpart B to only those persons who request, or have received, an extension of business credit from a financial institution. As such, the definition of applicant in final § 1002.102(b) does not include other persons who are or may become contractually liable regarding an extension of business credit such as guarantors, sureties, endorsers, and similar parties. As stated in final comment 102(b)–1, in no way are the limitations to the term applicant in § 1002.102(b) intended to repeal, abrogate, annul, impair, change, or interfere with the scope of the term applicant in existing § 1002.2(e) as applicable to existing Regulation B.

In response to the comment regarding loans jointly made to multiple borrowers, the Bureau does not believe that a modification to the definition of applicant is necessary. Rather, the Bureau is adding comment 103(a)–10 to address data collection and reporting if a covered financial institution receives a covered application from co-applicant businesses that are not affiliates, as defined in final § 1002.102(a). Final comment 103(a)–10 provides that if a covered financial institution receives a covered application from multiple businesses that are not affiliates, as defined by final § 1002.102(a), it shall compile, maintain, and report data pursuant to final §§ 1002.107 through 1002.109 for only a single applicant that is a small business, as defined in final § 1002.106(b). A covered financial institution shall establish consistent procedures for designating a single small business for purposes of collecting and reporting data under subpart B in situations where there is more than one small business co-applicant, such as reporting on the first small business listed on an application form. In addition, the Bureau notes that—if the applicants are affiliated entities—the rule already permits consideration of affiliates' revenues in determining whether a business qualifies as small. See the section-by-section analyses of §§ 1002.106(b) and 1002.107(a)(14) for additional discussion of affiliate revenue.

102(c) Business

Final § 1002.102(c) refers to § 1002.106(a) for a definition of the term “business.” See the section-by-section analysis of § 1002.106(a) for a detailed discussion of that definition.

102(d) Business Credit

Proposed § 1002.102(d) would have referred 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 “refer[ring] 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)–(d),” i.e., public utilities credit, securities credit, incidental credit, and government credit.

The Bureau received two comments specific to its proposed definition of business credit. These two commenters, both credit union trade associations, expressed support for the proposed definition, stating that it was familiar to credit unions and encompasses the most common business credit products aimed at small business borrowers. The Bureau also received numerous comments related to its proposed coverage of agricultural credit, parts of which also touched on the proposed definition of “business credit”; these comments are discussed below in the section-by-section analysis of § 1002.104(a).

The Bureau is finalizing § 1002.102(d) as proposed. Final § 1002.102(d) points to existing § 1002.2(g) in defining the term “business credit.” The Bureau believes it is appropriate to define business credit by reference to the existing definition in Regulation B, which incorporates by reference the meaning of “credit,” as defined in existing § 1002.2(j). For clarity and completeness, as discussed below, the Bureau is also adopting existing Regulation B's definition of credit. The Bureau's final rule uses the term business credit principally in defining a covered credit transaction in § 1002.104(a).

The Bureau notes that 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. For the purpose of subpart B, the Bureau is both incorporating existing § 1002.2(g)—which already includes partial carveouts for public utilities credit, securities credit, and incidental credit—and also finalizing complete exclusions for these types of credit from the definition of a covered credit transaction in § 1002.104(b). For clarity, the Bureau is separately defining these terms in § 1002.104(b) and explains the rationales for excluding each of them in the section-by-section analysis of § 1002.104(b) below. The Bureau is not adopting an exclusion for extensions of credit made to governments or governmental subdivisions, agencies, or instrumentalities, because governmental entities do not constitute small businesses under the final rule.

102(e) Closed-End Credit Transaction

Proposed § 1002.102(e) would have stated that a closed-end credit transaction means an extension of credit that is not an open-end credit transaction under proposed § 1002.102(n). The term “closed-end credit transaction” is undefined in section 1071. The Bureau's proposal would have specified 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. The definition of open-end credit transaction was addressed in proposed § 1002.102(n).

The Bureau sought comment on its proposed approach to the definition of a closed-end credit transaction. The Bureau received no comments and is finalizing § 1002.102(e) with one revision for clarity. The Bureau is revising the definition of a closed-end credit transaction to mean an extension of business credit that is not an open-end credit transaction under § 1002.102(n). The Bureau believes this definition is reasonable as it aligns with the definition of “open-end credit transaction” in final § 1002.102(o), and that such alignment will minimize confusion and facilitate compliance.

102(f) Covered Application

Final § 1002.102(f) refers to § 1002.103 for a definition of the term “covered application.” See the section-by-section analysis of § 1002.103 for a detailed discussion of that definition.

102(g) Covered Credit Transaction

Final § 1002.102(g) refers to § 1002.104 for a definition of the term “covered credit transaction.” See the section-by-section analysis of § 1002.104 for a detailed discussion of that definition.

102(h) Covered Financial Institution

Final § 1002.102(h) refers to § 1002.105(b) for a definition of the term “covered financial institution.” See the section-by-section analysis of § 1002.105(b) for a detailed discussion of that definition.

102(i) Credit

Proposed § 1002.102(i) would have referred 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, 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 sought comment on its proposed approach to this definition.

The Bureau received several comments regarding its proposed definition of “credit.” A few community groups expressed general support for a broad definition of credit. To ensure adequate coverage for future products, one commenter suggested defining credit to also cover situations where money is transmitted to a recipient but the money still effectively belongs to the transmitter and is to be repaid according to certain terms. Another commenter advocated for a credit definition that included as many lenders (and financing companies that are not technically lenders) as possible within the scope of this rulemaking, even when such companies are providing financing in a format that, according to the commenter, is not technically credit (the commenter offered cash advance and factoring companies as examples).

For the reasons set forth herein, the Bureau is finalizing § 1002.102(i) as proposed. Section 1002.102(i) refers to existing § 1002.2(j) for a definition of the term “credit.” The Bureau believes that aligning to the implemented definition of credit in ECOA for purposes of subpart B will help to foster consistency with existing Regulation B. The term credit in subpart B is used in the context of what constitutes a covered credit transaction—that is, whether the application is reportable under this final rule. See the section-by-section analysis of § 1002.104 below for a detailed discussion of what does, and does not, constitute a covered credit transaction for purposes of this final rule.

102(j) Financial Institution

Final § 1002.102(j) refers to § 1002.105(a) for a definition of the term “financial institution.” See the section-by-section analysis of § 1002.105(a) for a detailed discussion of that definition.

102(k) LGBTQI+ Individual and 102(l) LGBTQI+-Owned Business

Proposed Rule

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 this section.” In the NPRM, the Bureau sought 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 its proposal for collecting minority-owned business status and women-owned business status under proposed § 1002.107(a)(18) and (19). The Bureau also sought comment on whether including this question, along with others, 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.

This section-by-section analysis of § 1002.102(k) and ( l) discusses the Bureau's definition of LGBTQI+ individual and the related definition of LGBTQI+-owned business, respectively. Collection of LGBTQI+-owned business status is addressed in the section-by-section analysis of § 1002.107(a)(18).

Comments Received

The Bureau received comments from several lenders, individual commenters, and community and advocacy groups as to whether the Bureau should adopt a data point to collect an applicant's “LGBTQ+-owned business” status. As explained further in the section-by-section analysis of § 1002.107(a)(18), some of these commenters did not support including such a data point in the final rule (and thus did not make any suggestions for how an LGBTQ+-owned business should be defined). One commenter opposed collecting LGBTQ+ data without a corresponding proposal to modify the definition of minority-owned business.

In contrast, other commenters supported requiring the collection and reporting of applicants' LGBTQ+-owned business status information. As discussed further in the section-by-section analysis of § 1002.107(a)(18), commenters generally explained that collecting such data would enhance fair lending enforcement and identify credit needs for these small businesses.

Most of these commenters generally echoed the Bureau's use of the term “LGBTQ+-owned business” status in expressing their support for the data point. Several recommended that the Bureau require financial institutions' inquiries about such status to include a definition of the status and give applicants response options specifically indicating that they are or are not such a business, similar to the Bureau's proposed approach for requesting information about applicants' minority-owned and women-owned business status.

One commenter suggested that the Bureau use the phrase “LGBTQI+-owned business” and include a definition in the final rule. The commenter recommended that the Bureau define the term as a business where (1) more than 50 percent of the ownership or control of which is held by one or more individuals self-identifying as lesbian, gay, bisexual, transgender, queer, or intersex and (2) more than 50 percent of the net profit or loss accrues to one or more individuals self-identifying as lesbian, gay, bisexual, transgender, queer, or intersex. The commenter stated that this definition is similar to the definitions of minority-owned and women-owned businesses and consistent with other Federal government and expert practice and recommendations as well as the definition of “LGBTQ-owned business” in Federal legislation that was pending at that time.

Final Rule

As discussed further in part II above and the section-by-section analysis of § 1002.107(a)(18) below, the Bureau believes that the collection of an applicant's LGBTQI+-owned business status will aid in fulfilling the purposes of section 1071, by facilitating evaluations of potential discriminatory lending practices on the basis of sex in violation of fair lending laws and helping communities, governmental entities, and creditors identify needs and opportunities of small businesses. Thus, the Bureau is adopting § 1002.102(k) and ( l) pursuant to its authority under ECOA section 704B(e)(2)(H) to require financial institutions to compile and maintain any additional data that the Bureau determines would aid in fulfilling the purposes of section 1071 and 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 the statute. The Bureau is not, as suggested by one commenter, including LGBTQI+ status in the definition of minority-owned business, but is, as requested by multiple commenters, adopting a definition of LGBTQI+ owned business that largely parallels the definition of a minority-owned business.

For the reasons set forth herein, the Bureau is defining “LGBTQI+ individual” in final § 1002.102(k) as including an individual who identifies as lesbian, gay, bisexual, transgender, queer, or intersex. The Bureau is defining the term “LGBTQI+-owned business” in final § 1002.102( l) as “a business for which one or more LGBTQI+ individuals hold more than 50 percent of its ownership or control, and for which more than 50 percent of the net profits or losses accrue to one or more such individuals.” Both definitions are being included to facilitate the requirement in final § 1002.107(a)(18) that financial institutions collect an applicant's minority-owned, women-owned, and LGBTQI+-owned business statuses.

The Bureau agrees with a commenter's suggestion to use the term “LGBTQI+-owned business”—including an “I” to capture intersex individuals—instead of “LGBTQ+-owned business.” The Bureau believes that the term “LGBTQI+-owned business” better reflects the Bureau's intent to be broadly inclusive.

The Bureau notes that in user testing it conducted to assist its understanding of small business applicants' potential experience using the sample data collection form in the summer and fall of 2022, a few users were confused by the term “LGBTQI+-owned business.” Therefore, and consistent with commenters' suggestions, final comments 102( l)–2 and 107(a)(18)–2 explain that a financial institution must provide the definition of LGBTQI+-owned business when inquiring as to the applicant's business ownership status pursuant to final § 1002.107(a)(18). A financial institution may use the definition as set forth on the sample data collection form at appendix E. Final comment 102( l)–2 also clarifies that a financial institution must provide the definition of LGBTQI+ individual under final § 1002.102(k) if asked by the applicant, but does not need to do so unless asked.

Final comment 102( l)–2 clarifies that the definition of LGBTQI+-owned business is used only when an applicant determines if it is such a business for purposes of final § 1002.107(a)(18). The financial institution is not permitted or required to make its own determination as to whether an applicant is a LGBTQI+-owned business.

In line with commenters' suggestions, the definition for LGBTQI+-owned business in final § 1002.102( l) parallels concepts in the Bureau's definitions for minority-owned business and women-owned business in final § 1002.102(m) and (s), respectively. The final rule's LGBTQI+-owned business definition incorporates the same two-prong approach as the other business status definitions, with more than 50 percent ownership or control as the first prong and more than 50 percent of net profits or losses as the second prong.

The commentary for final § 1002.102( l ) generally mirrors the commentary for the minority-owned business and women-owned business definitions in the final rule. Final comment 102( l)–1 explains that a business must satisfy both prongs of the definition to be a LGBTQI+-owned business—that is, (A) more than 50 percent of the ownership or control is held by one or more LGBTQI+ individuals, and (B) more than 50 percent of the net profits or losses accrue to one or more LGBTQI+ individuals. Final comment 102( l)–1 clarifies that the first prong of the definition can be met through either the control or ownership requirements (as do final comments 102(m)–1 and 102(s)–1).

Final comments 102( l)–3 through –6 mirror the corresponding commentary for the definitions of minority-owned business and women-owned business and provide clarifications of terms used and the concepts of ownership, control, and accrual of net profits or losses.

102(m) Minority-Owned Business

Proposed Rule

As discussed further herein, the final rule combines proposed § 1002.102( l) (minority individual) into final § 1002.102(m) to streamline the rule and facilitate compliance.

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. 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). That statute defines “minority” to mean any Black American, Native American, Hispanic American, or Asian American. While section 1071 uses the term “minority individual” in 704B(h)(5), it does not define that term.

Proposed § 1002.102(l)—definition of minority individual. Proposed § 1002.102( l) would have clarified that the term “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. As explained in the NPRM, the Bureau believed that these categories represent contemporary, more specific delineations of the categories described in section 1204(c)(3) of FIRREA. Proposed comment 102( 1)–2 would have clarified that a multi-racial or multi-ethnic person is a minority individual. Proposed comment 102( 1)–1 would have clarified that this definition would be used only when an applicant determines whether it is a minority-owned business pursuant to proposed §§ 1002.102(m) (definition of minority-owned business) and 1002.107(a)(18) (data point for minority-owned business status). Proposed comment 102( 1)–3 would have clarified the relationship of the definition of minority individual to the disaggregated subcategories used to determine a principal owner's ethnicity and race.

The Bureau sought comment on its proposed approach to this definition, including its proposed clarification of the definition of minority individual, and requested comment on whether additional clarification was needed. The Bureau also sought comment on whether the definition of minority individual should include a natural person who is Middle Eastern or North African, and whether doing so should be dependent on whether Middle Eastern or North African is added as an aggregate category for purposes of proposed § 1002.107(a)(20).

Proposed § 1002.102(m)—definition of minority-owned business. Proposed § 1002.102(m) would have defined 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 losses accrue to one or more minority individuals. Proposed comment 102(m)–1 would have explained 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 have clarified 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 § 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 have further noted 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.

The Bureau proposed to clarify “ownership” and “control” using concepts from the beneficial ownership requirements in FinCEN's customer due diligence rule. Proposed comment 102(m)–4 would have clarified 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 have also provided examples of ownership and clarified 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 have clarified that a natural person controls a business if that natural person has significant responsibility to manage or direct the business, and would have provided examples of natural persons who control a business. Proposed comment 102(m)–6 would have clarified 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 sought 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 data collection pursuant to section 1071.

Comments Received

Proposed § 1002.102(l)—definition of minority individual. The Bureau received comments regarding the definition of minority individual from several industry commenters and community groups.

One community group stated that the Bureau's proposal to mirror HMDA with respect to the definition of minority individual is desirable because HMDA's racial and ethnic categories are reasonably comprehensive, and using the same categories eases reporting requirements and creates consistency for applicants. A group of trade associations and a bank supported the Bureau's proposal to define a minority individual using only aggregate ethnicity and race categories, stating that doing so will help lessen confusion. Another bank requested clarification on who is considered multi-racial or multi-ethnic for purposes of the rule.

Proposed § 1002.102(m)—definition of minority-owned business. The Bureau received comments regarding the definition of minority-owned business from lenders, trade associations, and community groups.

One community group stated that the collection of data on minority-owned businesses, along with the collection of data on women-owned businesses, will help illustrate the experience of firms owned by women of color who likely face even higher barriers to accessing small business credit than those firms not owned by women of color. The commenter noted that these firms comprise a significant portion of small businesses and there are a greater proportion of women of color who own businesses than the share of white-owned businesses owned by women. Another requested that the Bureau add an “I don't know” response to the list of possible responses, as there may be applicants who cannot make a legal conclusion as to whether the small business is minority-owned. A trade association asserted that inquiring about the ethnicity (or gender) of business owners is contrary to the expectations of financial institutions and applicants alike.

Regarding the proposed requirement that in order to be considered a minority-owned business, one or more minority individuals must hold more than 50 percent of the ownership or control of the business, the Bureau received comments from several community groups and lenders in support. Conversely, a trade association and a bank urged the Bureau to revise the requirement such that one or more minority individuals must hold “50 percent or more” of the ownership or control because the statutory definition may result in underreporting for equal partnerships with mixed race partners and this would, they said, slant the statistical picture.

Regarding the proposed requirement that in order to be considered a minority-owned business, more than 50 percent of the net profit or loss must accrue to one or more minority individuals, a community group stated that the definition is appropriate to prevent illusory “ownership” by a minority individual. Several other commenters also supported the definition.

Several industry commenters requested that the Bureau not include the requirement that more than 50 percent of the net profits or losses must accrue to one or more minority individuals. Some of these commenters stated that the initial prong of the definition requiring more than 50 percent of ownership or control by a minority individual is sufficient for determining ownership and would reduce complexity for borrowers. A CDFI lender stated that defining ownership based on a profit and loss calculation may not fully serve the objectives of the statute, and asked the Bureau to consider the CDFI Fund definition of minority-owned business. Several commenters also argued that the net profits or losses prong complicates the definition, could result in inaccurate data collection, implicates the limited understanding of many small business owners regarding the meaning of net profits and losses as well as the sensitive nature of these issues, and concluded that many small business owners will not understand the definition as provided and will, as a result, decline to answer the question.

A bank asked for clarification whether data (specifically demographic data) collected in prior years could be reused, and what to do if there are multiple collections. Specifically, the commenter gave an example of an applicant that provides demographic information for one application, and then chooses not to provide information for a subsequent application, and asking which collection should be reported. A trade association stated that it is possible in certain states for a third party non-owner to act as trustee of a trust, and that the Bureau should change a comment example to clarify whether it is the Bureau's intent to presume that the trustee of a trust is the owner. Another bank also asserted that requiring banks to collect such information is costly to banks, customers, and communities. A group of trade associations asserted that the commentary should be revised to explicitly state that a financial institution must provide an applicant with the applicable definition.

Several industry commenters supported the proposal to rely solely on the data provided by the applicant and that financial institutions should not be required to verify any such information provided by the applicant. With respect to self-certification of minority-owned business status, two trade associations supported permitting credit applicants to self-certify that 50 percent or more of the net profit or loss accrues to one or more minority individuals, rather than lenders needing to verify this information. Another trade association asserted that the applicant should solely determine whether the individual owners are multi-ethnic or multi-racial individuals and the financial institution should not be required to otherwise verify or report any information other than that supplied by the applicant.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.102(m) with a number of revisions to the regulatory text and commentary to incorporate the definition of minority individual. The Bureau has made these changes to streamline the rule and facilitate compliance. The Bureau is otherwise finalizing the associated commentary with a minor adjustment for clarity.

Final § 1002.102(m) defines a minority-owned business as a business for which one or more American Indian or Alaska Native, Asian, Black or African American, Native Hawaiian or Other Pacific Islander, or Hispanic or Latino individuals hold more than 50 percent of its ownership or control and for which more than 50 percent of the net profits or losses accrue to one or more such individuals. Final comment 102(m)–1 explains 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 such individuals, and (B) more than 50 percent of the net profits or losses accrue to one or more such individuals. Final comment 102(m)–1 includes an additional sentence to clarify that a business that is controlled by an individual with the characteristics listed in the regulatory text satisfies this prong of the definition even if none of the individuals with ownership in the business satisfies those characteristics.

Final comment 102(m)–2 clarifies that the definition of minority-owned business is used only when an applicant determines if it is a minority-owned business for purposes of final § 1002.107(a)(18), and is finalized with an adjustment made for clarity. Final comment 102(m)–3 is finalized as proposed and notes that a financial institution is permitted to assist an applicant when determining whether it is a minority-owned business but is not required to do so, may provide the applicant with the definitions of ownership, control, and accrual of net profits or losses set forth in final comments 102(m)–4 through –6, and that, for purposes of reporting an applicant's minority-owned business status, a financial institution relies on the applicant's determinations of its ownership, control, and accrual of net profits and losses.

Final comment 102(m)–4, finalized with minor edits for consistency and clarity, provides examples of ownership and clarifies that, where applicable, ownership needs to be traced through corporate or other indirect ownership structures. With regard to a commenter's assertion that, in certain states, a trustee could act as a third party non-owner trustee of a trust, the Bureau believes the trustee would be considered an owner for purposes of this definition. Final comment 102(m)–4 also clarifies (as it did in the Bureau's proposal) that a trustee is considered the owner of a trust.

Final comment 102(m)–5 clarifies that an individual controls a business if that individual has significant responsibility to manage or direct the business, while final comment 102(m)–6 clarifies that a business's net profits and losses accrue to an individual if that individual 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. Both comments are finalized with minor edits for consistency and clarity.

Final comments 102(m)–7 and –8 are adopted from the commentary to proposed § 1002.102( l) (respectively, proposed comments 102( l)–2 and –3). Final comment 102(m)–7 clarifies that an individual who is multi-racial or multi-ethnic constitutes an individual for which the definition of minority-owned business may apply, depending on whether the individual meets the other requirements of the definition. Final comment 102(m)–8 clarifies that the relationship of the ethnicity and race categories used in this section are aggregate ethnicity and race categories and are the same aggregate categories (along with Not Hispanic or Latino for ethnicity, and White for race) to collect an applicant's principal owners' ethnicity and race pursuant to final § 1002.107(a)(19). Final comment 102(m)–8 is revised from proposed comment 102( l)–3 to more clearly state the relationship of the ethnicity and race disaggregated subcategories in this comment to those used in final § 1002.107(a)(19). Proposed comment 102( l)–1 was not finalized because it was no longer relevant once the definition of minority individual was incorporated into the minority-owned business definition.

With respect to the categories of persons that constitute minorities for purposes of determining minority-owned business status, the Bureau believes its clarified terminology in final § 1002.102(m), which uses the aggregate ethnicity and race categories set forth in existing § 1002.13(a)(1)(i) and appendix B to Regulation C, will avoid the potentially confusing situation where an applicant is presented one set of aggregate ethnicity and race categories when answering questions about the principal owners' ethnicity and race pursuant to final § 1002.107(a)(19) (which also uses the same aggregate ethnicity and race categories) but is asked to use a different set of aggregate categories when indicating whether the business is a minority-owned business. It also avoids creating a situation where a financial institution is required to use different aggregate ethnicity and race categories when complying with different portions of Regulation B and, if applicable, Regulation C. This consistency across ethnicity and race data collection regimes will also allow for better coordination among data users when reviewing data. Further, the Bureau believes that these categories represent contemporary, more specific delineations of the categories described in section 1204(c)(3) of FIRREA.

The Bureau does not believe it would be appropriate to deviate from the statutory definition of a minority-owned business in the various ways some commenters suggested, and the Bureau's authority to deviate from the statutory language is limited. The Bureau also believes that many small business applicants already respond to questions about who owns and who controls a business entity when completing customer due diligence forms or otherwise responding to questions related to that rule and thus will be familiar with these concepts. Although the customer due diligence rule does not address the second prong of the definition regarding accrual of net profits or losses, final comment 102(m)–6 provides a comprehensive explanation of this prong of the definition.

With regard to comments urging the Bureau to remove the prong requiring that more than 50 percent of its net profits or losses accrue to one or more minority individuals in order to be considered a minority-owned business, aside from the Bureau's limited authority to deviate from the statutory language, the Bureau finds that this prong is necessary to prevent illusory “ownership” claims by “straw” owners.

Finally, with regard to commenters' requests for further clarification, in accordance with ECOA section 704B(g)(3), the Bureau may release material, as part of its regulatory implementation strategy, to assist both financial institutions with complying with the requirements of § 1002.102(m) and small businesses in understanding this definition.

102(n) Open-End Credit Transaction

Proposed § 1002.102(n) would have stated that an 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 would have specified 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 sought comment on its proposed approach to this definition. The Bureau received no comments and is finalizing § 1002.102(n) as proposed. The Bureau believes this definition is reasonable because it aligns with the definition of “open-end credit transaction” in Regulation Z § 1026.2(a)(20), and that such alignment will minimize confusion and facilitate compliance.

102(o) Principal Owner

Proposed Rule

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. Proposed § 1002.102(o) would have defined principal owner in a manner that is, in part, consistent with the beneficial ownership requirements in FinCEN's customer due diligence 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. Further, as noted in proposed comment 102(o)–1, 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. The Bureau also proposed 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 purposes of the rule, entities such as trusts, partnerships, limited liability companies, and corporations, would not be principal owners.

Proposed comment 102(o)–2 would have clarified 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)(20) and the ethnicity, race, and sex of its principal owners pursuant to proposed § 1002.107(a)(19). Proposed comment 102(o)–2 would have also explained that 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. Additionally, proposed comment 102(o)–2 would have noted 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.

The Bureau explained that aligning the proposed definition of principal owner with the 25 percent ownership definition in the customer due diligence rule would likely be familiar to most financial institutions and applicants. The customer due diligence rule is broadly in use and banks, credit unions, and certain other financial institutions must comply with that rule. Further, the Bureau believed that applicants, as a general matter, would be more likely to be familiar with customer due diligence requirements than SBA or CDFI Fund requirements because they have to complete customer due diligence forms before opening an initial account ( i.e., loan or deposit account) at a bank or at certain other institutions. However, unlike the customer due diligence rule, due to potential complications with collecting ethnicity, race, and sex information for principal owners, the Bureau proposed that individuals that only indirectly own 25 percent or more of an applicant's equity interests, as well as entities and trusts, would not be considered principal owners for purposes of the rule. The Bureau sought comment on its proposed definition, including its proposal to not include individuals that only indirectly own 25 percent or more of an applicant's equity interests as principal owners.

Comments Received

The Bureau received comments on this aspect of the proposal from a number of banks, trade associations, community groups, and a business advocacy group. Some of the industry commenters and a community group supported the Bureau's proposed definition for principal owner. A group of trade associations agreed with the Bureau's proposal to align, in part, the definition with the customer due diligence rule, stating that financial institutions are already familiar with ownership concepts through that rule. Trade association commenters also supported the Bureau's proposal not to include entities and indirect ownership by natural persons, with one stating that the concepts of ownership by entities and indirect ownership would add unnecessary complexity to the Bureau's final rule and another noting that its members found them difficult concepts to explain and determine. The community group supporting the Bureau's proposed definition for principal owner stated that the proposed definition made intuitive sense, as 25 percent is a significant amount of ownership.

Several other industry commenters did not support the Bureau's proposed definition. Specifically, these commenters requested that the Bureau look to and align with all the concepts of the customer due diligence rule. The commenters stated that because financial institutions and customers are familiar with the customer due diligence rule and financial institutions already identify principal owners thereunder, consistency between the two regulatory regimes would reduce complexity and facilitate compliance. A business advocacy group stated that aligning the rules completely would allow financial institutions to leverage existing processes and training and focus on customer needs rather than regulatory interpretation. Another commenter argued that a new definition for principal owner under the rule would add unnecessary complexity to the loan origination process. A lender specifically suggested that financial institutions be required to identify and verify the identity of each individual who owns 25 percent or more of the entity, and one individual who controls the entity, as is required under the customer due diligence rule. Another commenter similarly argued for replicating this requirement for the rule, arguing that financial institutions would not find it challenging to trace indirect ownership because they already do so under the customer due diligence rule, that the approach would be familiar to small business applicants structured as legal entities, and that small businesses that are not legal entities ( e.g., sole proprietorships) likely would not have complicated equity structures.

Two industry commenters that supported aligning principal owner definition in the Bureau's rule more closely with the customer due diligence rule than proposed by the Bureau also expressed concern that differences in the definition between the regulatory regimes would lead to customer confusion. One of these commenters argued that confusion would likely result for applicants who will be asked to provide information about principal owners under both rules at the same point of the origination process. The other asserted that confusion as a result of different definitions would increase the possibility that customers would refuse to provide information.

A bank commented that the Bureau's proposal did not provide enough guidance or procedures for how financial institutions should handle reporting for small business applicants whose principal owner(s) are a separate corporate entity or trust.

Another bank stated that financial institutions should not be required to determine the ownership of small businesses, which it said the proposed rule would require.

A trade association, which requested an exclusion for applications from trusts from coverage under the final rule, raised a question about who should be considered a principal owner of a trust for data collection purposes, such as whether they should be the settlors, beneficiaries, trustees, or some combination thereof.

Final Rule

For the reasons set forth herein, the Bureau is finalizing its definition of principal owner in § 1002.102(o) and associated commentary with certain adjustments. The Bureau believes it is appropriate to align, in part, its definition of principal owner with the 25 percent ownership concept in FinCEN's customer due diligence rule given financial institutions' and applicants' likely familiarity with that rule's requirements. The Bureau does not believe, however, that its definition must completely match the ownership and control requirements in the customer due diligence rule as urged by some commenters. While differences between similar concepts in different regulatory regimes may lead to some initial confusion, particularly as financial institutions (as well as small business applicants) already familiar with the customer due diligence rule implement this final rule's requirements, the Bureau believes that adding the concepts of indirect ownership by natural persons, as well as ownership by entities or trusts, to the definition of principal owner would add unnecessary complexity to this final rule.

Generally, FinCEN's customer due diligence rule defines a beneficial owner as not just any individual who directly owns 25 percent or more of a legal entity, but also includes individuals who indirectly have that amount of ownership in the entity, such as through multiple corporate structures. If a trust directly or indirectly owns 25 percent or more of the entity, the trustee is considered to be a beneficial owner. In addition to ownership, the customer due diligence rule also looks to control. A beneficial owner also includes the single individual with significant responsibility to control, manage, or direct the entity.

The Bureau does not believe that it would be appropriate for the rule's definition of principal owner to incorporate indirect ownership and control, as suggested by some commenters. This final rule requires covered financial institutions to collect and report the ethnicity, race, and sex of small business applicants' principal owners and includes the definition of principal owner at § 1002.102(o) for the purpose of facilitating financial institutions' and applicants' ability to provide such information. The Bureau believes that a simpler definition for principal owner that aligns with the customer due diligence rule's general 25 percent or more ownership concept, but which only applies to individuals (not entities or trusts) with direct ownership, will encourage applicants to provide their principal owners' ethnicity, race, and sex and facilitate more accurate reporting. With the simpler definition for principal owner, applicants do not need to first make potentially difficult determinations about which individuals indirectly own or control the small business before providing such individuals' ethnicity, race, and sex information.

The Bureau does not believe differences between the customer due diligence beneficial owner definition and the principal owner definition in this rule will lead applicants to refuse to provide their principal owners' ethnicity, race, and/or sex information, as suggested by one commenter. In contrast, the Bureau believes that its principal owner definition is less complicated and easier to understand and is more likely to facilitate applicants' willingness to provide their principal owners' information.

With respect to a commenter's assertion that the NPRM did not provide enough guidance or procedures for how financial institutions should handle reporting for small business applicants whose principal owner(s) are a separate corporate entity or trust, under the final rule (as generally in the proposal), only individuals are considered principal owners. Thus, entities, such as trusts, partnerships, limited liability companies, and corporations, are not principal owners. Final comment 107(a)(19)–10 clarifies that if an applicant has fewer than four principal owners ( e.g., because only one individual owns 25 percent or more of the equity interests of the small business), the financial institution reports ethnicity, race, and sex information for the number of principal owners that the applicant has identified and reports that the ethnicity, race, and sex fields for additional principal owners are “not applicable.” (In the NPRM, this clarification generally appeared in proposed appendix G, instruction 25.)

Relatedly, as discussed in the section-by-section analysis of § 1002.106(a), a trust may also be a small business applicant (as opposed to a trust that is an owner of small business applicant) under the final rule. In this case, as was noted by a trade association commenter, it is unclear who should be considered a principal owner for the purpose of principal owners' ethnicity, race, and sex information. The Bureau has added new comment 102(o)–2 clarifying that if a trust is an applicant for a covered credit transaction, a trustee is considered an owner of the trust, to align with commentary accompanying the definitions for LGBTQI+-owned business, minority-owned business, and women-owned business.

As to a commenter's concern that the rule would require financial institutions to determine the ownership of a business, it is unclear as to the specific aspect of the Bureau's proposal to which the commenter was referring. Under the Bureau's proposal (as in the final rule), a financial institution would collect and report the following information related to the ownership of an applicant: the applicant's status as a minority-owned and/or women-owned small business (as well as LGBTQI+-owned business status), the number of principal owners, and the ethnicity, race, and sex of those principal owners. A financial institution can rely (and, in fact, for the protected demographic information, must rely) upon an applicant's self-reported information. This aspect of those data points has been substantially finalized as proposed. Final comment 107(a)(18)–9, regarding the collection and reporting of women-owned, minority-owned, and LGBTQI+-owned business status information clarifies that a financial institution must only report an applicant's responses, even if it verifies or otherwise obtains such information. Final comment 107(a)(20)–2, regarding the collection and reporting of the number of an applicant's principal owners, also provides that a financial institution may rely upon an applicant's statements or information to report such information. It further provides that the financial institution is not required to verify the number of an applicant's principal owners, but if it does so, then it must report the verified information. Thus, a financial institution is not required to make its own determinations about the ownership of a business under the final rule.

In light of the foregoing, the text of final § 1002.102(o) and final comment 102(o)–1 generally remain unchanged from the proposal, though upon further consideration the Bureau has changed the reference to “natural person” in the proposed definition and related comment to “individual” in the final rule. In user testing conducted on versions of the Bureau's proposed sample data collection form at appendix E, users expressed confusion about the term “natural person.” The Bureau does not believe that there is a meaningful difference between the terms “individual” and “natural person” and as a result has decided to use the term “individual” in the definition for comprehensibility.

The Bureau is finalizing proposed comment 102(o)–2, renumbered as final comment 102(o)–3, to explain the purpose of the definition of principal owner; the Bureau has revised this comment to reflect other changes in the rule.

102(p) Small Business

Final § 1002.102(p) refers to § 1002.106(b) for a definition of the term “small business.” See the section-by-section analysis of § 1002.106(b) for a detailed discussion of that definition.

102(q) Small Business Lending Application Register

Proposed § 1002.102(q) would have defined the term “small business lending application register” or “register” as the data reported, or required to be reported, annually pursuant to proposed § 1002.109. This definition referred only to the data that is reported, or required to be reported, annually; it did not refer to the data required to be collected and maintained (prior to reporting). The Bureau sought comment on its proposed definition of “small business lending application register” or “register” in proposed § 1002.102(q). The Bureau received no comments on this definition, and therefore is finalizing § 1002.102(q) as proposed.

102(r) State

Proposed § 1002.102(r) would have referred 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 requested comment on its proposed approach to this definition, but did not receive any feedback. The Bureau is finalizing § 1002.102(r) as proposed. The Bureau believes that, being consistent with existing Regulation B, this definition will be familiar to financial institutions.

102(s) Women-Owned Business

Proposed Rule

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)(6) 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. 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.

Proposed § 1002.102(s) would have defined 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. Proposed comment 102(s)–1 would have explained 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 have clarified 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 § 1002.107(a)(19). A financial institution would have provided 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 have been 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 have further noted 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.

The Bureau proposed to clarify “ownership” and “control” using concepts from FinCEN's customer due diligence rule. Proposed comment 102(s)–4 would have clarified 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 have also provided examples of ownership and clarified 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 have clarified 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 have clarified 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 sought 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 women-owned businesses for purposes of data collection pursuant to section 1071.

Comments Received

The Bureau received comments regarding the definition of a women-owned business from a number of banks, trade associations, and community groups.

One community group requested that the Bureau add an “I don't know” response to the list of possible responses, as there may be applicants who cannot make a legal conclusion as to whether the small business is women-owned.

Regarding the proposed requirement that to be considered a women-owned business, one or more women must hold “more than 50 percent” of the ownership or control, the Bureau received several comments from community groups and a CDFI lender supporting this requirement. A trade association stated that the Bureau should revise the requirement to state that one or more women must hold “50 percent or more” of the ownership or control because the statutory definition may result in underreporting for equal partnerships with mixed gender partners.

Regarding the proposed requirement that to be considered a women-owned business, more than 50 percent of the net profit or loss must accrue to one or more women, one community group stated that the statutory definition is appropriate to prevent illusory “ownership” by one or more women. Another commenter supported the definition.

Some commenters stated that the Bureau should not include the statutory definition requirement that more than 50 percent of the net profit or loss must accrue to one or more women. A number of commenters stated that the initial prong of the definition requiring more than 50 percent of ownership or control by a woman is sufficient for determining ownership and would reduce complexity for borrowers. A CDFI lender stated that defining ownership on a profit and loss calculation may not fully serve the objectives of the statute, and asked the Bureau to consider the CDFI Fund definition of women-owned business. Several industry commenters asserted that the net profits or losses prong complicates the definition, can result in inaccurate data collection (for example, in spousal relationships where each partner equally owns and controls a small business), implicates the limited understanding of many small business owners regarding the meaning of net profits and losses as well as the sensitive nature of these issues, and that many small business owners will not understand the definition as provided and will, as a result, decline to answer the question.

A bank asked for clarification whether data (specifically demographic data) collected in prior years could be reused, and what to do if there are multiple collections. Specifically, the commenter gave an example of an applicant that provides demographic information for one application, and then chooses not to provide information for a subsequent application, and asking which collection should be reported. A trade association stated that it is possible in certain States for a third party non-owner to act as trustee of a trust, and that the Bureau should change a comment example to clarify whether it is the Bureau's intent to presume that the trustee of a trust is the owner. Another bank also asserted that requiring banks to collect such information is costly to banks, customers, and communities. A group of trade associations asserted that the commentary should be revised to explicitly state that a financial institution must provide an applicant with the applicable definition.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.102(s) with one addition and one minor adjustment for clarity, along with several non-substantive technical revisions to update citations to other provisions.

Final § 1002.102(s) defines 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. Final comment 102(s)–1 explains that a business must satisfy both prongs of the definition to be a women-owned business and includes an additional sentence to clarify that a business that is controlled by a woman or by women satisfies this prong of the definition even if none of the individuals with ownership in the business are women.

Final comment 102(s)–2 clarifies that the definition of women-owned business is used only when an applicant determines if it is a women-owned business for purposes of final § 1002.107(a)(18), and is finalized as proposed with the exception of one small adjustment for clarity.

Final comment 102(s)–3 is finalized as proposed and notes that a financial institution is permitted to assist an applicant when determining whether it is a women-owned business but is not required to do so, may provide the applicant with the definitions of ownership, control, and accrual of net profits or losses set forth in final comments 102(s)–4 through –6, and that, for purposes of reporting an applicant's women-owned business status, a financial institution relies on the applicant's determinations of its ownership, control, and accrual of net profits and losses.

Final comment 102(s)–4 is finalized with an updated cross-reference and minor edits for consistency and clarity. It provides examples of ownership and clarifies that, where applicable, ownership needs to be traced or followed through corporate or other indirect ownership structures. With regard to a commenter's assertion that, in certain states, a trustee could act as a third party non-owner trustee of a trust, the Bureau believes that in such circumstances, the trustee would be considered an owner for purposes of this definition. Final comment 102(s)–4 also clarifies (as it did in the Bureau's proposal) that a trustee is considered the owner of a trust.

Final comment 102(s)–5 clarifies that an individual controls a business if that individual has significant responsibility to manage or direct the business, while final comment 102(s)–6 clarifies that a business's net profits and losses accrue to an individual if that individual 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. Both comments are finalized with minor edits for consistency and clarity.

The Bureau does not believe that it would be appropriate to deviate from the statutory definition of women-owned business, as suggested by some commenters, and notes that the Bureau's authority to deviate from the statutory language is limited. The Bureau also believes that many small business applicants already respond to questions about who owns and who controls a business entity when completing customer due diligence forms or otherwise responding to questions related to that rule and thus will be familiar with the concepts therein. Although the customer due diligence rule does not address the second prong of the definition regarding accrual of net profits or losses, final comment 102(s)–6 provides a comprehensive explanation of this prong of the definition.

With regard to comments urging the Bureau to remove the prong requiring that more than 50 percent of its net profits or losses accrue to one or more women in order to be considered a women-owned business, the Bureau finds that this prong is necessary to prevent illusory “ownership” claims by “straw” owners.

Finally, in accordance with ECOA section 704B(g)(3), the Bureau may release material, as part of its regulatory implementation strategy, to assist both financial institutions in complying with the requirements of § 1002.102(s) and small businesses in understanding this definition.

Proposed Definition of Dwelling

Proposed § 1002.102(j) would have referred 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 have provided 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). Proposed comment 102(j)–2 would have clarified 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 did not receive any comments on this aspect of the proposal.

The Bureau is not finalizing its proposed definition of “dwelling.” The need for the Bureau to adopt its own definition of “dwelling” in this rulemaking is obviated by the Bureau's decision in this final rule to not require reporting of transactions that would constitute “covered loans” under Regulation C. That decision is discussed in detail in the section-by-section analysis of § 1002.104 below. The Bureau understands that there may be limited instances where a dwelling is used as collateral for a covered credit transaction that does not fall under the definition of a Regulation C covered loan because it does not involve the purchase, improvement, or refinance of a dwelling—for example, where a small business seeks to use their primary dwelling as collateral to obtain working capital such as inventory. In this example, the transaction would only be reported under the final rule, not under Regulation C, with a credit purpose of working capital (includes inventory or floor planning) per final comment 107(a)(6)–1. Taking into account these limited circumstances, the Bureau believes that adopting the Regulation C definition of dwelling is no longer necessary to minimize the compliance risks that would have arisen from having to report a transaction under both Regulation C and this final rule.

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 finalizing § 1002.103 and associated commentary with minor revisions for clarity and consistency, 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. Final § 1002.103(a) provides a general definition of the term “covered application,” followed by a list of the circumstances that are not covered applications in final § 1002.103(b). For the reasons discussed below, the Bureau believes that its determinations as to what does and does not constitute a covered application for purposes of this rulemaking constitute reasonable interpretations of an “application” as used in section 1071.

103(a) Covered Application

Proposed Rule

The Bureau proposed 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. As noted above, the term “application” is undefined in section 1071. The Bureau believed its proposed definition of the term was reasonable, particularly as it would align with the similar definition of “application” in existing § 1002.2(f). The Bureau also proposed commentary to accompany this definition.

In considering the proposed definition of a “covered application,” the Bureau believed that incomplete and withdrawn applications—which would have generally been captured under proposed § 1002.103(a)—would be essential to the purposes of section 1071 as a tool to identify potential discrimination and to better understand the credit market. The definition of “covered application” in proposed § 1002.103(a), which was similar to the definition of “application” in existing § 1002.2(f), would have also been familiar to creditors and would have provided flexibility to accommodate different application processes.

The Bureau recognized that the proposed definition of “covered application” in § 1002.103(a), while flexible, would have meant that data collection and reporting may be triggered at different times for different financial institutions and different types of covered credit transactions. While the proposed definition of “covered application” would not have provided a bright-line rule, the Bureau believed the proposed definition would have been familiar to financial institutions and would have provided consistency with similar definitions found in existing Regulation B and Regulation C.

As discussed in the NPRM, the Bureau also considered proposing several other options for defining a “covered application.” First, the Bureau considered triggering 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. As noted in the NPRM, the Bureau did not propose 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 have excluded incomplete applications and many withdrawn applications that may reflect demand for credit or potential discrimination during the application process. The Bureau also considered proposing to define “covered application” as a set of specific data points that, if collected, would trigger a duty to collect and report small business lending data. As noted in the NPRM, the Bureau did not propose this approach for several reasons, including that it would have introduced a new regulatory definition of “application,” would have led to operational changes and complexities for financial institutions, and could have led to increased evasion.

Proposed comments 103(a)–1 through –3 would have provided additional guidance on identifying what is a “covered application.” Proposed comments 103(a)–4 through –6 would have addressed 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)–7 would have addressed how a financial institution would report applications where there is a change in whether the applicant is requesting a covered credit transaction.

The Bureau sought comment on its proposed definition of a covered application in § 1002.103(a) and associated commentary. The Bureau also sought 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 sought 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 approach in proposed comment 103(a)–6.

Comments Received

The Bureau received comments on its proposed approach to defining a covered application from a wide range of lenders, trade associations, community groups, and a business advocacy group. The overwhelming majority of commenters to address the issue, including most industry commenters and some community groups, generally supported the Bureau's proposal to define a “covered application” largely consistent with the existing Regulation B definition. Several of these commenters stated that lenders are familiar with the existing Regulation B definition and so implementing it within this rule would minimize the need for additional training or new procedures. Commenters also stated that the proposed definition is a flexible one that can accommodate the variety of small business lenders, products, and processes that exist in the marketplace, and thus avoids a one-size-fits-all approach that would be unworkable in small business lending. Several lenders and trade associations urged the Bureau to finalize proposed comment 103(a)–1, which would have provided that 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. Some of these commenters also stated that the proposed comment is consistent with longstanding interpretation of existing Regulation B and that the flexibility is critical given the unique nature of commercial credit applications. A community bank stated that defining an application based on a set of specific data points would be inappropriate for commercial lending, which is less standardized than consumer mortgage lending. The bank further noted that defining an application based on a standardized set of data points would be unnecessary so long as each data point has a “not applicable” or “not received” choice for incomplete applications, which the commenter emphasized would be important to capture.

Some community groups and community-oriented lenders expressed support for the Bureau's proposed definition because it would capture applicants that do not make it to a completed application, and therefore potentially help identify barriers to credit early in the application process. These commenters argued that the proposed definition would further the purposes of section 1071, including by identifying potential bias, discouragement, or other discrimination. Similarly, some community-oriented lenders stated that the proposed definition would strike the right balance of triggering data collection and reporting requirements only after there is an actual request for credit, but still early enough in the process to capture most incomplete, withdrawn, and denied applications.

One community group expressed concern about the lack of standardization under the proposed definition, but ultimately concluded that the proposed definition makes sense and any concerns could be allayed through monitoring. The commenter expressed understanding for the desire to follow current lender procedures for defining an application based on existing Regulation B, though noted that how a lender defines an application should have enough standardization to generate consistent data and be early enough in the process to capture incomplete and withdrawn applications, which are necessary to identify discouragement. The commenter also expressed support for the idea that peer comparisons may be a reasonable way to check a financial institution's method of defining an application; for example, by analyzing whether a financial institution has abnormally high rates of approval or low rates of incomplete applications.

A number of industry commenters, including community banks, credit unions, and trade associations, described the small business application process as informal and consultive. These commenters explained that the application process often does not involve a written application or a “formal” application, can be months-long, and often involves extensive back-and-forth communications between the lender and the small business, including in-person meetings, phone calls, texts, and emails. One commenter noted that many loans are funded without any “application,” but rather based on the business's existing relationship with the institution and financial information on file. Some commenters described how the application process can start informally from a conversation, a general inquiry, or as an offshoot to deposit activity. Commenters explained that a business will bring in financial statements, tax returns, business plans, and other documents, which will be reviewed by the financial institution in order to analyze and generate the most appropriate package to fit the credit needs of the business. Several banks stated that business customers will often “shop around” with multiple financial institutions to get the best terms. Several commenters stated that small business lending often involves a lot of “hand holding” and lender involvement to reach a point where a formal application or a particular product and terms can be considered. Industry commenters also stated that commercial business customers are unique and each requires an individualized approach based on the characteristics of the business and the products of interest. Several commenters also noted that the small business lending process differs from mortgage lending, which is highly regimented and uniform.

A number of community banks and other industry commenters expressed concern that the Bureau's rule implementing section 1071 would standardize and formalize the small business application process (which, they asserted, would be to its detriment); they predicted that business customers would be unhappy with the more rigid lending structure, and may avoid seeking credit altogether. These commenters expressed concern that small business lending would become impersonal and “form centric,” and that it would change the fundamental relationship between lender and borrower, including the personalized attention and advice currently provided by lenders. Many of these commenters stated the view that the rule's data collection and reporting requirements would cause them to lose flexibility and adopt “check-the-box” criteria that is at odds with how community banks conduct business. Several commenters were concerned that at the start of an inquiry, a lender would need to implement a written application or other formalized method to collect the required data and that by doing so, conversations will turn into implied commitments. Commenters also stated the belief that lenders would implement a more rigid application process in order to avoid triggering data collection and reporting requirements under the Bureau's rule. Several other commenters argued that data collection and reporting obligations would require lenders to rebuild their loan application process and incur additional training and other costs, would reduce the availability of credit, and would give large banks an unfair advantage because such entities will have an easier time implementing the requirements of the Bureau's rule for online applications.

Most of these commenters' concerns were directed at small business lending data collection and reporting generally, and not specifically at the proposed definition of a covered application. However, a few commenters urged the Bureau to finalize a more concrete definition of covered application due to the concern that a subjective definition would be difficult for financial institutions' employees to implement. One commenter was also concerned about how its practices would be reviewed by the subjective judgment of examiners. Another commenter cautioned against reporting of oral applications, noting that it could lead to inaccurate data if an answer is misheard or mistyped.

Some industry commenters, including trade associations for community banks, credit unions, and online lenders, requested the Bureau define a covered application consistent with existing Regulation B's “completed application” definition in existing § 1002.2(f), which would require reporting only when the lender has received all the information that the creditor regularly obtains and considers in evaluating applications for the amount and type of credit requested ( i.e., enough information to make a credit decision). These commenters argued that triggering data collection and reporting off an “oral or written request” would be unrealistic, unworkable, and too open-ended. One commenter stated that a mere request is not something a lender can act or report on because there is insufficient information at that point to make the required reporting. Another commenter said that lenders need clear guidance on what events trigger data collection and the completed application definition would provide the most uniformity across products and financial institutions. Another commenter stated that using the completed application definition would avoid collecting data on incomplete applications, which often come from “unengaged” applicants. This commenter also noted that collecting 1071 data could lead to applicant confusion as to why personal information is being collected, which could lead to more incomplete applications. The commenter further argued that completed applications are the most essential data to capture in small business lending, that there is no indication Congress intended section 1071 to mirror HMDA or existing Regulation B, and that discouragement can be investigated using other 1071 data and existing examination authorities. Similarly, two industry commenters opposed requiring reporting on incomplete or withdrawn applications, arguing that reporting such transactions would not serve the purposes of section 1071, would create additional operational and regulatory burden, and that the focus of the Bureau's rule should be on declined and originated applications. Another urged the Bureau to avoid triggering collection based on when a credit check is pulled, noting that financial institutions may often conduct a soft pull credit check outside the application process.

In contrast, some community group commenters argued that the proposed definition of covered application would be too narrow, and requested that a covered application include all communications where a business inquires about credit and seeks a credit decision. In support, the commenters pointed to research identifying discrimination in the pre-application stage. As noted above, other community group commenters supported the Bureau's proposed definition of a covered application, stressing the need to capture applications that do not make it to a completed application.

The Bureau received several comments on certain aspects of its proposed commentary to § 1002.103(a). A community bank and a community group supported proposed comment 103(a)–4, which would have provided 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 bank stated that while the proposed approach would result in more work for the financial institution, it would lead to more accurate reporting (since each request would generate different reported data) and the approach would be similar to how data are reported under Regulation C. The community group commenter stated that it would be a reasonable approach and would accurately reflect the varied credit needs of applicants. A group of community group commenters supported the Bureau's proposed approach to require reporting of separate applications where an applicant seeks two or more products at one time, but requested that where the applicant only seeks one product, but is not sure about the type of product, it should only be reported as a single covered application. These commenters also noted a concern that the language in proposed comment 107(a)(5)–2 requiring lenders to maintain reasonable procedures designed to collect data, including regarding the credit product requested, would require the lender to identify each product that would be acceptable to the applicant, and if multiple, report them as separate covered applications.

In response to the Bureau's request for comments as to how a financial institution should report applications where there is a change in whether the request for credit involves a covered credit transaction, which was addressed in proposed comment 103(a)–7, the Bureau received feedback from trade associations and a business advocacy group. These commenters opposed reporting on a transaction in which the product ultimately pursued is not a covered credit transaction. They argued that financial institutions should not be required to report on non-covered credit transactions, collecting partial data on a product that is not a covered transaction would affect data quality and be of low value, and doing so would not advance the purposes of section 1071. Two of the commenters sought clarification or a safe harbor providing that if a financial institution collects data on an application that the financial institution anticipates will be covered by the Bureau's rule implementing section 1071 at the time of collection, but ultimately is not covered, the initial collection does not violate existing Regulation B. Otherwise, the Bureau did not receive any additional comments directly discussing proposed comment 103(a)–7 and limited reporting of non-covered credit products, despite seeking 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.

Although the Bureau did not seek comment on the issue, a couple commenters asked how to report on an application made jointly by multiple business co-applicants. An agricultural lender requested that, if an application is submitted by more than one business, the financial institution be permitted to treat all co-applicants as one applicant when determining whether a borrower is a “small business.” The commenter also asked the Bureau to clarify how to identify whether the application is from a minority-owned or women-owned business where one, but not all, co-applicants are minority- and women-owned businesses. Another commenter requested that the Bureau clarify that loans jointly made to multiple businesses, where one or more of the co-applicants may qualify as a small business under the rule, but are not the primary business seeking the funding, are not subject to data collection and reporting requirements.

Several commenters asked the Bureau to clarify certain scenarios related to a covered application, including clarifying that certain scenarios are not covered applications. Several industry commenters were concerned that language in the NPRM's preamble—noting that ECOA section 704B(b)(1) provides that 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—may be interpreted to require a financial institution to accept an application through all of these channels. One commenter asked for clarification whether a covered application includes an incomplete application where the information provided is insufficient to render a credit decision by the lender. A trade association representing online lenders asked the Bureau to expressly exclude from the definition of a covered application the circumstance where a business populates certain information on a web page, but does not follow through with submitting the form to the financial institution. The commenter argued that it would be very burdensome for the financial institution to capture such circumstances as reportable transactions and that attempting to do so would result in misleading, erroneous, and unhelpful data. A couple commenters requested certain additional exclusions from the definition of covered application, including for HMDA reporters, co-branded and private label credit cards, and purchased loans.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.103(a) as proposed to define a “covered application” 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. As described above, the overwhelming majority of commenters, including industry and community group commenters, supported this definition. As noted by some commenters, the definition will be familiar to creditors, provides flexibility to accommodate different application procedures and lending models (including written and oral applications), and will capture incomplete and withdrawn applications, which are essential data for identifying potential barriers to credit, including potential discrimination. Final § 1002.103(a) will also align with the similar definition of “application” in existing § 1002.2(f), which is reasonable given the term “application” is otherwise undefined in ECOA and section 1071. Finally, the Bureau believes this approach strikes an appropriate balance by triggering data 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, which are essential data to the purposes of section 1071.

A number of industry commenters, particularly smaller institutions that engage in relationship lending, described the application process as informal, high-touch, and involving extensive back-and-forth. The Bureau believes the final definition of covered application can work well within the heterogeneous and sometimes iterative context of small business lending. Indeed, final § 1002.103(a) defines covered application in a manner that provides financial institutions flexibility to define an application based on its own unique business model. Thus, while a financial institution must have some type of trigger or tipping point within its process when an applicant has made a request for credit in accordance with its procedures, therefore triggering a “covered application,” financial institutions have leeway on how precisely to define that tipping point, provided it occurs in the early stages of the process before a financial institution has begun meaningfully evaluating or underwriting the request. Moreover, as noted above, creditors complying with existing Regulation B should be familiar with this definition, and have already incorporated it in some manner into their processes. In response to industry commenters' concern that data collection and reporting under this final rule will standardize and formalize small business lending, the Bureau notes that most of this feedback was not directed at the proposed definition of a “covered application,” but rather at the overall data collection and reporting regime. Indeed, some of the commenters raising these concerns also expressly supported the proposed definition of a covered application. Moreover, in response to commenters' general concerns that data collection and reporting under this rule will standardize and formalize small business lending, the Bureau does not believe that collection of certain data points will necessitate that lenders to fundamentally alter how they conduct business. Moreover, section 1071 is a congressional mandate; the Bureau has sought to implement it in a manner that furthers the purposes of the statute while reducing unnecessary burden.

Several commenters had specific suggestions or concerns regarding the definition of a covered application. Regarding several commenters' concern that the definition is too subjective, the Bureau notes that a bright-line definition would likely impose a more rigid process on financial institutions that would be difficult to implement given the heterogenous nature of small business lending. Moreover, as noted above, the definition used in final § 1002.103(a) should be familiar to financial institutions and will provide consistency with existing Regulation B and Regulation C. The Bureau is also not adopting existing Regulation B's definition of a “completed application,” as urged by some commenters. Although the Bureau agrees that a “completed application” definition would provide greater uniformity, the definition would exclude incomplete applications and most withdrawn applications. The Bureau believes including such applications is essential to the purposes of section 1071, as it may reflect demand for credit and potential discrimination early in the application process. As to the commenters who took issue with the proposed covered application definition precisely because it includes incomplete and withdrawn applications, the Bureau believes collecting data on such applications is likewise essential for the purposes of section 1071 and may reveal important trends or information on why small businesses initially seek credit, but ultimately do not complete the application process.

On the other hand, the Bureau does not believe it would be appropriate to expand the definition of “covered application” to include all communications where a business inquires about credit and seeks a decision. Although discrimination may occur in the pre-application phase, the Bureau believes that it could be very difficult as an operational matter for financial institutions to collect 1071 data whenever a business expresses any interest in credit, no matter how preliminary or informal the request, and that could require reporting of transactions with missing, unavailable, or erroneous data. As discussed below in the section-by-section analysis of § 1002.103(b), the Bureau is excluding inquiries and prequalification requests from the definition of a covered application; many of the reasons for those exclusions are relevant here as well and thus the Bureau is not broadening the general definition of a covered application. In response to a commenter's concern about reporting of oral applications, the Bureau notes that it is the responsibility of the financial institution to ensure that it accurately collects and reports required data pursuant to final § 1002.107, no matter the method of application. Commenter requests for certain additional exclusions from the definition of covered application, including for HMDA reporters, co-branded and private label credit cards, and purchased loans, are addressed in more detail in the section-by-section analysis of § 1002.104 below.

Several commenters asked the Bureau to clarify certain scenarios related to a covered application. First, in response to several industry commenters' concerns that the language in the NPRM's preamble discussing ECOA section 704B(b)(1) could be interpreted to require a financial institution to accept an application through all of these channels, the Bureau notes that this was not the intent and that it does not interpret ECOA section 704B(b)(1) in that manner. Rather, the Bureau interprets the statutory language to mean that data collection and reporting requirements apply regardless of a financial institution's method of accepting applications. Thus, whatever the means used by a financial institution to accept applications ( e.g., in person, by telephone, by electronic transmission, etc.), once a covered application is triggered, the financial institution has a duty to collect and report on the application.

Next, a commenter asked whether a covered application includes an incomplete application where the information provided is insufficient to render a credit decision by the lender. Assuming the business has requested a covered credit transaction in accordance with procedures used by a financial institution for the type of credit requested, the financial institution would be required to collect and report data, even if there is insufficient information to render a credit decision. Indeed, as noted above, the Bureau believes capturing incomplete or withdrawn applications is essential to the purposes of section 1071.

In response to a trade association's request to expressly exclude from the definition of a covered application the circumstance where a business populates certain information on a web page, but does not follow through with submitting the form to the financial institution, the Bureau notes that reporting of such circumstances depends on the procedures used by a financial institution for the type of credit requested. For example, if a financial institution's procedures require an applicant to submit a paper or digital form to the financial institution in order to be considered for the credit product requested, then there is no covered application that is reportable until the business submits the form to the financial institution. If, on the other hand, the financial institution regularly begins evaluating information about the applicant even if the form is not “officially” submitted to the financial institution, then there is likely a reportable covered application, even if the applicant has not “submitted” the form. In other words, if a financial institution offering online applications does not track or begin to evaluate applications until the business presses a “submit” button, the financial institution would not be required to begin tracking partial information inputted online for purposes of this final rule.

One commenter was concerned that the proposed definition lacked standardization, and emphasized the need for monitoring to ensure that financial institutions define an application under their own procedures in a manner that generates consistent data and is early enough in the process to capture incomplete and withdrawn applications. The Bureau agrees that review of data, including peer analysis, is important and may indicate whether a financial institution collects data in a manner that appropriately captures incomplete and withdrawn applications. For example, instances of unusually high approval rates or unusually low rates of incomplete and withdrawn applications can preliminarily indicate financial institutions that may be seeking to define an “application” in its written policies as occurring later in the process than actually occurs in practice; if a financial institution has a very high approval rate because all “applications” have been vetted earlier in the process, the financial institution's stated definition of an application likely does not reflect its actual practices. Similarly, where a financial institution has very few incomplete or withdrawn applications this may—depending on the financial institution's product offering and business model—be a sign that the financial institution is collecting data or defining an application as occurring after an applicant has requested credit. While a financial institution has flexibility to identify its own procedures for what constitutes a request for credit, thereby triggering data collection and reporting obligations under this final rule, the Bureau anticipates that in most cases a covered application will typically occur before the financial institution underwrites or evaluates the request for credit.

The Bureau is finalizing comment 103(a)–1 with minor revisions for clarity. Final comment 103(a)–1 underscores that a financial institution has latitude to establish its own application procedure and to decide the type and amount of information it will require from applicants. The Bureau removed the word “process” (from the phrase “process and procedures”) in proposed comment 103(a)–1 to align with the term “procedures” in final § 1002.103(a) and in final comment 103(a)–2; the rewording is not intended to indicate a substantive change. The Bureau is also finalizing as proposed comments 103(a)–2 and –3. Final comment 103(a)–2 explains 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. Final comment 103(a)–3 provides that the commentary accompanying existing §§ 1002.2(f) and 1002.9 is generally applicable to the definition of “covered application,” except as provided otherwise in final § 1002.103(b).

In response to certain commenter questions about the scope of a covered application, the Bureau is adding new comment 103(a)–4 to clarify that the term covered application does not include solicitations, firm offers of credit, and other evaluations or offers initiated by the financial institution because in these situations, the business has not made a request for credit, and provides illustrative examples. New comment 103(a)–4, including a summary of comments received relating to the change, is discussed in the section-by-section analysis of § 1002.103(b).

The Bureau is finalizing comment 103(a)–5 (proposed as comment 103(a)–4) to provide that if an applicant makes a request for two or more covered credit transactions at one time, the financial institution reports each request as a separate covered application. The Bureau believes this approach furthers 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 this method of reporting will lead to higher data accuracy, as argued by one commenter, due to the simplicity of the approach. Finally, the Bureau believes that concerns about duplicative information requests will be mitigated by permitting financial institutions to reuse certain previously collected data, as set forth in final § 1002.107(d). In response to a commenter request, the Bureau is revising final comment 103(a)–5 to clarify that if an applicant is only requesting a single covered credit transaction, but has not decided on which particular product, the financial institution reports the request as a single covered application. This clarification resolves a commenter's concern that a financial institution will need to report multiple covered applications if more than one credit product is acceptable to the applicant. Final comment 103(a)–5 also provides illustrative examples.

The Bureau is finalizing comments 103(a)–6 and –7 (proposed as comments 103(a)–5 and –6) with minor adjustments for clarity and consistency. Final comment 103(a)–6 addresses the circumstance where an initial request for a single covered credit transaction would result in the origination of multiple covered credit transactions. Similarly, final comment 103(a)–7 addresses requests for multiple lines of credit at one time, providing that such requests are reported based on the procedures used by the financial institution for the type of credit account.

The Bureau is adopting new comment 103(a)–8 to address reporting of duplicate covered applications. Under new comment 103(a)–8, a financial institution may treat two or more duplicate covered applications as a single covered application for purposes of subpart B, so long as for purposes of determining whether to extend credit, the financial institution would also treat one or more of the applications as a duplicate under its procedures. The Bureau is adding this comment to respond to commenters' general concerns about duplicative reporting and because the Bureau does not believe reporting of true duplicates would further the purposes of section 1071. As set forth in new comment 103(a)–8, however, the provision only applies if the applications are duplicates that a financial institution would otherwise treat as such under its own procedures.

The Bureau is finalizing comment 103(a)–9 (proposed as comment 103(a)–7) with revisions for clarity. Final comment 103(a)–9 addresses how a financial institution reports applications where there is a change in whether the applicant is requesting a covered credit transaction. Final comment 103(a)–9 provides that if an applicant initially requests a product that is not a covered credit transaction, but prior to final action taken decides to seek instead a product that is a covered credit transaction, the application is a covered application and must be reported pursuant to final § 1002.109. However, if an applicant initially requests a product that is a covered credit transaction, but prior to final action taken 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. The Bureau agrees with commenters' concerns that requiring reporting on applications where the applicant ultimately does not seek a covered credit transaction could lead to data quality issues, for example, if only partial data are captured. Although the Bureau sought comment on whether to require full or limited reporting in order to address concerns about potential steering in these cases, the Bureau did not receive any specific comments advocating for either full or limited reporting. In response to commenter requests for clarification that a financial institution does not violate existing Regulation B if it collects otherwise prohibited information on a transaction that ultimately is not a covered application, the Bureau has revised final § 1002.112(c)(4) to provide a safe harbor for incorrect determination of a covered credit transaction if, at the time of collection, the financial institution had a reasonable basis for believing that the application was a covered application. The Bureau has also revised final comment 103(a)–9 to clarify that once a financial institution determines there is a covered application, it shall endeavor to compile, maintain, and report the data required under § 1002.107(a) in a manner that is reasonable under the circumstances. Final comment 103(a)–9 also discusses reporting if a financial institution makes a counteroffer for a product that is not a covered credit transaction. Finally, the Bureau revised the language “during the application process” to “prior to final action taken” in final comment 103(a)–9 to provide greater clarity on the applicable timeframe.

The Bureau is adding new comment 103(a)–10 to address reporting in situations where a covered financial institution receives a covered application from multiple businesses that are not affiliates, as defined in final § 1002.102(a). The Bureau is adding this commentary in response to commenters' questions about how to report certain data if there is more than one co-applicant. Final comment 103(a)–10 provides that if a covered financial institution receives a covered application from multiple businesses who are not affiliates, as defined by final § 1002.102(a), it shall compile, maintain, and report data pursuant to final §§ 1002.107 through 1002.109 for only a single applicant that is a small business, as defined in final § 1002.106(b). A covered financial institution shall establish consistent procedures for designating a single small business for purposes of collecting and reporting data under subpart B in situations where there is more than one small business co-applicant, such as reporting on the first small business listed on an application form.

The Bureau considered requiring reporting data of all co-applicant small businesses, but doing so could potentially add significant complexity and may result in data quality issues. For example, reporting co-applicants as separate applications would likely result in duplicative reporting or special rules to address how to modify the reported data to avoid duplication. Similarly, requiring additional fields to accommodate reporting of all co-applicants' information would result in a significant expansion of the total data fields reported, adding considerable complexity and potentially leading to data quality issues. Given that only two commenters raised the issue of co-applicants, the Bureau believes that financial institutions likely do not frequently encounter applications involving more than one small business applicant.

On the other hand, the Bureau is not requiring reporting of a small business co-applicant only if it is the primary business seeking funding, as suggested by one commenter. The Bureau believes it may not always be clear who is the “primary” applicant if there are multiple co-applicants; such a rule could be used to evade reporting altogether in these situations. The Bureau therefore believes that it is reasonable to require data collection and reporting for a single small business if there are multiple co-applicants. Final comment 103(a)–10 provides several illustrative examples. In addition, new § 1002.5(a)(4)(x) permits a creditor to collect certain demographic information concerning a co-applicant without violating existing Regulation B. See also the section-by-section analysis of § 1002.106(b) for a discussion of calculating gross annual revenue for purposes of determining small business status under final § 1002.106(b) if there are multiple co-applicants.

Lastly, the Bureau is adding new comment 103(a)–11 to clarify that refinances and requests for additional credit amounts on an existing account are covered applications, as further discussed in the section-by-section analysis of § 1002.103(b).

103(b) Circumstances That Are Not Covered Applications

Proposed Rule

Proposed § 1002.103(b) would have identified certain circumstances that are not covered applications—even if they may otherwise be considered an application under existing § 1002.2(f). Specifically, the Bureau proposed that a covered application would 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. Solicitations and firm offers of credit would also not have been “covered applications” under the proposed definition. Proposed comments 103(b)–1 through –5 would have provided additional guidance and examples of circumstances that do and do not trigger data collection and reporting for covered applications.

The Bureau sought comment on proposed § 1002.103(b) and associated commentary concerning circumstances that would not be a covered application. Solicitations for comment on specific issues are noted throughout the discussion below.

Reevaluation, extension, or renewal requests on an existing business credit account, unless the request seeks additional credit amounts. The Bureau proposed 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 requests for additional credit amounts. The Bureau believed 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, would have added complexity and burden for financial institutions, while potentially providing limited additional information relevant to the purposes of section 1071.

However, the Bureau proposed that reporting would have been required for requests for additional credit amounts (such as line increases or new money on existing facilities). The Bureau believed that capturing requests for additional credit amounts would further the purposes of section 1071, particularly the community development purpose, as it would have more accurately captured demand for credit.

Inquiries and prequalification requests. The Bureau proposed to exclude inquiries and prequalification requests from what constitutes a “covered application.” The Bureau believed that requiring data collection for all inquiries and prequalification requests could create operational challenges and pose data accuracy issues, including raising the risk of missing, unavailable, erroneous, or duplicative data.

The Bureau also considered whether to only require reporting of inquiries and prequalification requests in situations that would otherwise be treated as an “application” under existing Regulation B— i.e., when the financial institution evaluates information about the business, decides to decline the request, and communicates this to the business. Ultimately, the logistics of reporting an inquiry or prequalification request only in these circumstances (where an inquiry or prequalification request becomes an “application” under existing § 1002.2(f)) could be operationally challenging for financial institutions, could lead to data distortion as only denials would be captured, and could cause unintended market effects.

On the other hand, potential discrimination may occur in these early interactions with a financial institution. In particular, the Bureau was concerned about excluding data on inquiries and prequalification requests when the financial institution evaluates information about a business and declines the request, as such data may be useful for identifying potential discouragement of or discrimination against applicants or prospective applicants.

Ultimately, however, the Bureau believed it was 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.

The Bureau sought comment on a number of issues in connection with the reporting of inquiries and prequalification requests. For example, the Bureau sought 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, and communicates this to the business. Related to this alternative approach, the Bureau further sought comment on whether additional data fields would 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, the Bureau sought comment on whether financial institutions would want the option to report all prequalification requests and inquiries, to allow for a comparison with denials.

Solicitations, firm offers of credit, and other evaluations or offers initiated by the financial institution. Proposed comment 103(b)–4 would have clarified that the term covered application does not include solicitations and firm offers of credit. The Bureau explained that like other reviews or evaluations initiated by the financial institution, these communications do not involve an applicant requesting credit, and so would not be “covered applications.” Excluding solicitations and firm offers of credit would also be consistent with the language of ECOA section 704B(b)(1), which expressly contemplates that an application could arise in response to a solicitation by a financial institution, though the text is silent on solicitations without any applicant response. Thus, consistent with the statutory language, the Bureau proposed that a solicitation or firm offer of credit could become a “covered application” under the proposed definition if an applicant responds to the solicitation or offer by requesting a covered credit transaction.

Comments Received

The Bureau received comments on its proposal to identify certain circumstances that are not covered applications, even if they otherwise would have been considered an application under existing § 1002.2(f), from a wide range of lenders, trade associations, community groups, and a business advocacy group.

Some commenters, including several lenders and trade associations, expressly supported all the clarifications of circumstances that are not reportable in proposed § 1002.103(b). One noted that the proposed exclusions would avoid duplicative steps and keep the data collection focused on its core purposes. Other commenters stated that the proposed exclusions were appropriate because they would not provide useful data and that the proposal would help ease financial institutions' transition to data collection. Comments on particular aspects of proposed § 1002.103(b) are discussed below.

Reevaluation, extension, or renewal requests on an existing business credit account, unless the request seeks additional credit amounts. Many industry commenters supported the Bureau's proposed exclusion of reevaluations, extensions, or renewal requests on an existing business credit account. However, industry commenters largely urged the Bureau to exclude requests for additional credit amounts on existing accounts. These commenters argued that reporting line increases would add unnecessary complexity and time to an otherwise streamlined process that occurs with high frequency, in response to rapid changes to business conditions, and is typically automated, which they said further lowers any risk of discrimination. These commenters argued that data collection for line increases would hurt small businesses by introducing hurdles in transactions where time is of the essence, and might discourage businesses from seeking line increases or creditors from offering them. Commenters also noted differences in how credit line increases are underwritten compared to other business credit: the process typically does not involve an application or other documentation, may involve limited underwriting, and any analysis performed is usually focused on the business's past performance and relationship with the financial institution. In addition, commenters expressed concern that including line increases would distort the data (for example, by “double reporting” accounts or because of the unique nature of credit line increases) or would provide data of limited value. A couple commenters emphasized the potential compliance difficulties for financial institutions, noting that excluding line increases would be simpler and avoid the need for financial institutions to determine who initiated a line increase. A trade association raised the additional concern that reporting of credit line increases and other requests for additional credit amounts will inflate the number of originations counted for purposes of determining whether an institution is a covered financial institution. In support of excluding modifications more generally, one commenter stated that modifications are not explicitly covered by other consumer financial laws and regulations, such as HMDA, the Real Estate Settlement Procedures Act of 1974 (RESPA), and Regulation Z.

Although opposed to the reporting of line increases, several commenters urged that, to the extent such transactions are reportable, the Bureau should mitigate the burden on financial institutions by (1) exempting any existing account from data collection under the Bureau's rule; and (2) permitting lenders to rely on prior responses regardless of when provided, unless there is a reason to believe the data are inaccurate. In support of the first proposal, these commenters argued that existing accounts may need challenging technology build-outs to integrate the rule's data collection requirements and existing clients may not be used to the collection process.

Most community groups to comment on this issue generally requested that all such circumstances (reevaluations, extensions, renewals), as well as refinances, be treated as reportable applications. These commenters argued that there should be a reportable application whenever a business communicates an interest in obtaining credit and has requested lender action, or if the lender takes action on the request, such as pulling a credit report, the business's tax information, or obtaining other data that can be used for underwriting—particularly if the financial institution's actions might negatively affect the business (for example, by lowering their credit score). A few commenters specifically focused on renewals and extensions, urging the Bureau to require reporting of these transactions, and to separate such transactions in the data from new originations. These commenters argued that renewals and extensions are an important source of credit for businesses and not reporting such circumstances would create a disconnect with Community Reinvestment Act (CRA) reporting. One commenter urged the Bureau to collect verbal and written agricultural loan modification or restructuring requests made to the Farm Service Agency, arguing that such requests constitute applications under existing Regulation B, highlighting concerns about discrimination in loan servicing and the detrimental effects on businesses when servicing applications are not granted, including default, acceleration, and foreclosures. Some commenters further argued that lender-initiated renewals should also be captured, given the detrimental effect they may have on a business that is “denied” credit or experiences a reduction in access to credit.

Several commenters requested clarification on aspects of the Bureau's proposed approach to reevaluation, extension, or renewal requests. A community bank was uncertain what dates to report under § 1002.107(a)(2) and (9) (application date and action taken date) for requests for additional credit on existing accounts, and was concerned that if the dates changed from the initial origination, it could be construed as a data misrepresentation. Several other commenters inquired whether a transaction is a reportable covered application if a new note is executed as part of a request to consolidate existing credit amounts under the same terms or as part of a periodic review extending the credit under the same terms. A sales-based financing company explained that its customers often request funding over time, and asserted that each new request for credit should be reportable.

Inquiries and prequalification requests. The industry commenters to weigh in on inquiries and prequalification requests, including several banks, a CDFI lender, trade associations, and a business advocacy group, overwhelmingly supported the Bureau's proposal to exclude inquiries and prequalification requests. Commenters argued that including inquiries and prequalification requests would be operationally difficult given the high volume of such requests and because the interactions typically occur before the financial institution has the infrastructure in place to track requests for credit. They also argued that including such interactions could be misleading and lead to data accuracy issues, given the informal nature of such requests and because many such inquiries are subsequently abandoned or otherwise left incomplete. A business advocacy group also noted concerns about duplicative reporting of inquiries and prequalification requests if the business ultimately submits a credit application. A group of trade associations for insurance premium finance lenders argued that including inquiries and prequalification requests would be unworkable for their lenders, who are often not aware of a prospective applicant's interest in credit until they receive an agreement from the applicable insurance agent or broker; as a result, such financial institutions would be unaware of any inquiries or prequalification requests. Another commenter argued that reporting such transactions would effectively punish borrowers for inquiring about qualification requirements, products, and rates. Finally, one commenter stated that each financial institution should be permitted to define what constitutes an application, including any exclusions. Although industry commenters were generally in favor of the exclusion, a number of industry commenters stated that the line between inquiries or prequalification requests and covered applications should be sufficiently clear to avoid uncertainty during implementation, and asked the Bureau provide examples, in commentary to the rule, to differentiate these scenarios.

Conversely, a number of commenters, including a lender and community groups, urged the Bureau to require reporting on all or some inquiries and prequalification requests. Citing a study identifying the prevalence of discrimination in the pre-application phase, commenters argued that the definition of covered application must be broad enough to capture pre-application phase discrimination. Several commenters requested that all communications where a business inquires about credit and seeks a credit decision should be reportable; another commenter urged reporting whenever the financial institution pulls a credit report or takes other action to begin underwriting. Several other commenters suggested that the Bureau align with existing Regulation B's treatment of prequalifications by treating denied inquiries and prequalifications as reportable applications. One community group emphasized the importance of having online applications reported, including online prequalification requests in particular. The commenter argued that the absence of such data has been detrimental in the HMDA context, it creates an imbalance between online and traditional lenders, and the burden of reporting would be low as lenders are already required to capture such transactions for purposes of providing adverse action notices.

Although the Bureau sought comment on whether, alternatively, to define a “covered application” consistent with Regulation C—which does not require a financial institution to report prequalification requests and does not address reporting of inquiries more generally—the Bureau did not receive any comments directly on this point. Similarly, the Bureau did not receive any comments directly responding to its request for comment on the frequency with which financial institutions accept prequalification requests 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. In addition, the Bureau did not receive any comments in response to its request for feedback on whether assumptions are used in the small business lending context and whether reporting of assumptions for small business lending would further the purposes of section 1071.

Solicitations, firm offers of credit, and other evaluations or offers initiated by the financial institution. A number of industry commenters urged the Bureau to exclude “preapprovals,” which the commenters described as credit offered or originated by the financial institution without an initiating application from the business (including offers for a different product or offers to extend additional credit amounts). One of the commenters was particularly concerned about lender-initiated offers based on data collected or acquired by the financial institution about the small business; for example, a financial institution that uses deposit account data to evaluate a business for credit card offers. The commenter argued that in these circumstances, the business has not been “denied” credit because it never applied for credit; similarly, the commenter argued, accepted offers also should not be reported because there is no initiating application from the business. The commenter further argued that reporting of originated offers initiated by the financial institution would skew the data, as it would only reflect approvals. Reporting of “denied” offers, argued the commenter, would be infeasible, create confusion for the customer, and likely lead lenders to discontinue extending such offers altogether. Several other industry commenters similarly urged the Bureau to exclude “preapprovals,” though they did not explain what precisely they meant by the term. One commenter argued that while preapprovals are clearly articulated in Regulation C, “preapprovals” do not exist in the small business lending space.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.103(b) as proposed to identify certain circumstances that are not covered applications, even if they otherwise would have been considered an application under existing § 1002.2(f). Specifically, final § 1002.103(b) provides 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. The Bureau is finalizing comments 103(b)–1 through –4 with minor revisions for clarity and consistency, to provide additional guidance and examples of circumstances that do and do not trigger data collection and reporting under the definition of a covered application. The Bureau is finalizing comment 103(b)–5, which discusses inquiries and prequalification requests, to provide additional discussion and examples distinguishing a covered application from an inquiry or prequalification request. As discussed in the section-by-section analysis of § 1002.103(a) above, the Bureau is also adding new comment 103(a)–4 to clarify that solicitations, firm offers of credit, or other evaluations initiated by the financial institution are not a covered application; however, if the business seeks to obtain the credit offered, the business's request constitutes a covered application.

Reevaluation, extension, or renewal requests on an existing business credit account, unless the request seeks additional credit amounts. Pursuant to final § 1002.103(b)(1), the Bureau is excluding reevaluation, extension, or renewal requests on an existing business credit account, unless the request seeks additional credit amounts, from the definition of a covered application. The Bureau believes that requests to modify the terms or duration of an existing extension of credit—such as extensions on the duration of a credit line or changes to a guarantor requirement—occur with high frequency in the small business lending space. If the Bureau were to require reporting of such circumstances, the Bureau believes it would add complexity for reporting financial institutions while, as some commenters have noted, potentially providing limited additional information relevant to the purposes of section 1071. Moreover, the Bureau believes that broadly including requests to modify the terms or duration of existing extensions of credit might affect data quality absent additional flags to distinguish the transactions from new originations, as well as to identify the particular nature of the changes. The Bureau further notes that Regulation C takes a similar approach by excluding reporting of loan modifications.

Although some commenters argued that such transactions should be reported because they would provide a better understanding on the availability of credit, the Bureau believes such benefits would be modest, particularly absent additional data concerning how the modified credit request differs from the original request, which would require the collection of a number of additional data points. Similarly, although one commenter urged the Bureau to collect verbal and written agricultural loan modification or restructuring requests made to the Farm Service Agency, as discussed directly above, the Bureau believes expanding data collection and reporting requirements to all modification requests (except requests for additional credit amounts) would add significant complexity for lenders, could be duplicative, and may provide limited benefits without knowing the precise terms changed in the modification request. Nor does the Bureau believe that the definition of covered application should be expanded to encompass any expression of interest from a business to obtain credit or action by the financial institution towards underwriting; as noted above in the section-by-section analysis of § 1002.103(a) above, triggering data collection and reporting obligations too early could add significant complexity and affect data quality.

The Bureau believes that requiring reporting of requests for additional credit amounts (such as line increases or new money on existing facilities) is appropriate. Capturing requests for additional credit amounts directly furthers the purposes of section 1071, particularly the business and community development purpose, as it will more accurately capture demand for credit. Although industry commenters opposed reporting on new credit amounts due to what they described as the streamlined, fast-paced nature of such reviews, the Bureau believes those factors do not outweigh the benefits of having these data collected and reported. Moreover, the Bureau does not believe that collecting data on such transactions will be so time consuming or difficult that it will dissuade small businesses from seeking the additional credit they need, particularly in light of final § 1002.107(d), which permits financial institutions to reuse applicant-provided data in certain circumstances. Collecting data on requests for additional credit amounts will assist in fair lending testing and provide additional insight into small business credit trends and availability, furthering the purposes of section 1071, even if—as some commenters suggested—line increases are often underwritten differently than new requests for credit.

Regarding commenters' concerns about duplicative reporting, the Bureau notes that pursuant to final § 1002.107(a)(7) and (8), the financial institution only reports the additional credit amount sought (and approved or originated, as applicable)—not the entire credit amount extended—therefore avoiding duplicative reporting. Moreover, the fact that a request is for a line increase will be reflected in the reporting of credit purpose pursuant to final § 1002.107(a)(6). Thus, unlike renewals or modifications more generally, which may occur for a variety of reasons, requests for additional credit amounts and the amounts requested will be clearly identifiable in the data. The Bureau also believes that commenters' concerns about the time and difficulty associated with collecting data are further mitigated by final § 1002.107(d), which permits a financial institution to reuse certain data points under certain circumstances. In response to a commenter's concern that reporting of credit line increases and other requests for additional credit amounts will inflate the number of originations counted for purposes of determining whether an institution is a covered financial institution, the Bureau notes that new comment 105(b)–4 clarifies that requests of additional credit amounts on an existing account are not counted as originations for the purpose of determining whether a financial institution is a covered financial institution pursuant to § 1002.105(b).

The Bureau is also providing specialized rules for the reporting of line increases, as suggested by several commenters. One suggested strategy—exempting accounts that are in place before this final rule goes into effect— could significantly reduce reportable transactions, potentially for years into the future. Moreover, under the tiered implementation period set forth in final § 1002.114(b), the Bureau believes that financial institutions (and their customers) will have adequate time to adjust to reporting. Similarly, in response to a different commenter's question about reporting requests for additional credit amounts, the Bureau notes that if there is an application for an additional credit amount on a covered credit transaction, a financial institution must collect data pursuant to this final rule even if the existing account was opened prior to the applicable compliance date.

The Bureau is also not adopting the commenters' second suggestion—to indefinitely allow financial institutions to rely on prior applicant responses—as the commenters provide no reason why reused data are more trustworthy in the context of requests for additional credit amounts, compared to other existing customers' requests for new credit. However, pursuant to final § 1002.107(d), financial institutions may reuse most applicant-provided data, so long as there is no reason to believe the data are inaccurate, for up to 36 months. Although not specific to requests for additional credit amounts, this provision may ease some of the commenters' concerns.

In response to comments, mainly from community groups, regarding the importance of having refinance transactions reported, the Bureau is revising comment 103(b)–2 to make clear that an applicant's request to refinance, which occurs when an existing obligation is satisfied and replaced by a new obligation undertaken by the same borrower, is reportable. The Bureau agrees with commenters that refinance transactions should be covered applications; they legally constitute a new credit obligation, and so are typically included within regulatory schemes governing originations. Indeed, as one commenter correctly noted, the Bureau's inclusion of refinancing categories for the credit purpose data point (in proposed comment 107(a)(6)–1) in the proposed rule shows that the Bureau intended for refinances to be reportable transactions.

Several other commenters also requested clarification on aspects of the Bureau's proposed approach to reevaluation, extension, or renewal requests. In response to a community bank's questions regarding what dates to report under § 1002.107(a)(2) and (9) (application date and action taken date) for requests for additional credit on existing accounts, the Bureau notes the dates should be based on the new request for credit. Because a request for additional credit amounts is considered a separate covered application pursuant to final § 1002.103(a), all data reported, including applicable dates, should be in reference to the new request for credit, and not the initial origination. Several other commenters inquired whether a transaction is a reportable covered application if a new note is executed as part of a request to consolidate existing credit amounts under the same terms or as part of a periodic review extending the credit under the same terms. If an existing obligation is satisfied by a new credit obligation, as determined by contract and State law, it would generally be reportable as a covered application (assuming the other conditions of a covered application are met). Although in certain circumstances this may require reporting of credit amounts previously outstanding under a different credit obligation with the same borrower and with similar or identical terms, the Bureau believes that seeking to exempt these fact-specific circumstances would add considerable complexity to the rule and could undermine data quality. The Bureau generally agrees with the assertion that each new request for credit that is separately evaluated should be reportable (excluding counteroffers, pursuant to final comment 107(a)(9)–2). If a financial institution evaluates each new request for credit, then each of those instances should be reported as separate covered applications for the amount advanced. For example, if a small business makes several requests for advances from a merchant cash advance provider, each of which is evaluated by the provider, each of those requests will typically constitute a separate covered application. In contrast, if a financial institution extends a line of credit up to a specified amount, then any request drawn against the line within that established limit is authorized and would not be a separate covered application. See also existing § 1002.2(q), which defines the term to “extend credit” or “extension of credit.”

Inquiries and prequalification requests. As the Bureau explained in the NPRM, 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. Generally, an inquiry occurs when a prospective applicant 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. Under existing Regulation B comments 2(f)–3 and 9–5, an inquiry or prequalification request may become an “application” 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, 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. Finally, Regulation C excludes all prequalification requests from HMDA reporting, even if the prequalification request constitutes an application under existing Regulation B.

Pursuant to final § 1002.103(b)(2), a “covered application” does not include inquiries and prequalification requests, even in circumstances where the inquiry or prequalification request may constitute an “application” under existing § 1002.2(f). The Bureau agrees with commenters who stated that reporting inquiries or prequalification requests would be extremely operationally difficult given the volume of such requests and because such requests typically occur very early in the process, making it difficult to obtain or track applicant-provided data. There could be data quality issues given the sometimes-informal nature of such requests, which could raise the risk of missing, unavailable, or erroneous data. As noted by one commenter, reporting inquiries and prequalification requests could also be duplicative if the applicant subsequently applies for credit in accordance with the procedures designated by the financial institution; the Bureau would potentially need to create a separate data field or flag to distinguish such requests. Requiring reporting of such interactions could also lead financial institutions to pull back on offering prequalification reviews or engaging with prospective applicants, which could inhibit prospective applicants from shopping around for the best terms. As discussed in the section-by-section analysis of § 1002.103(a) above, small depository institutions have expressed concern that this rule will overly formalize small business lending and inhibit relationship lending. Given these concerns, the Bureau is not expanding the definition of a covered application to include pre-application conduct, such as every time a business inquires about credit or if a financial institution pulls information about the business, as urged by some community groups.

The Bureau also is not requiring, as suggested by some commenters, 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 business, decides to decline the request, and communicates this to the business. The logistics of reporting an inquiry or prequalification request only in these circumstances could be operationally challenging for financial institutions and could lead to data distortion in a manner inconsistent with the statutory purposes of section 1071, as only denials would be captured. In this case, a financial institution may prefer to report all inquiries and prequalification requests, which could lead to some of the challenges identified above. Moreover, a financial institution will not know ex ante whether a prequalification will result in the financial institution notifying the business it is unlikely to qualify, and so the financial institution would likely need to collect 1071 data at the beginning of the interaction regardless. Although the Bureau sought comment about its concerns related to the reporting of only denials, no commenters specifically addressed this issue.

As noted above, one commenter emphasized the importance of having online applications reported, including online prequalification requests in particular, arguing that the absence of reporting would lead to a lack of data and an imbalance among lenders. The Bureau notes, however, that the final rule does not exclude online applications (nor did the proposal). While prequalification requests are excluded for the reasons discussed above, that exclusion is not limited to a particular channel. However, to the extent an online questionnaire is truly a voluntary tool for businesses to shop around for potential terms, and not an application under the procedures established by the financial institution, the Bureau believes such inquiries should be excluded for the reasons described above.

Of course, requests for credit that meet the definition of “covered application” are 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, the application is reportable. If, on the other hand, the business asks about potential credit offerings, but then chooses not to request credit, there is no covered application.

In response to commenters' request to provide further examples, in commentary to the rule, to differentiate inquiries or prequalification requests and covered applications, the Bureau has added to comment 103(b)–5 additional illustrative examples.

The Bureau has also made minor revisions to comment 103(b)–4 for clarity and consistency.

In sum, 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. However, the Bureau does share commenters' concerns about discrimination that may occur in the pre-application phase. As discussed above, the Bureau believes it is important for regulators and other enforcers to review data collected and reported pursuant to section 1071 to preliminarily identify where financial institutions might not be appropriately defining an application, and for financial institutions to self-monitor for the same. For example, as discussed above, very high approval rates or very low rates of incomplete or withdrawn applications may be a preliminary indication that the financial institution is evading its obligations, for example, by collecting 1071 data late in the application process. Similarly, such rates may also suggest that the financial institution has a regular practice of decisioning requests for credit through “inquiries” or “prequalification requests”; if such reviews are regularly conducted and effectively function as a prescreening tool for the financial institution, they should be reported as a “covered application.”

The Bureau believes it is important for regulators and other enforcers to also carefully review the data for indicia of potential illegal discouragement in the pre-application stage, and for financial institutions to self-monitor for the same. For example, analyzing the rates of applications from small businesses within majority-minority neighborhoods, as compared to a financial institution's peers, may be useful to identify potential discrimination. Finally, the Bureau notes that inquiries and prequalification requests where the institution evaluates information about the consumer or business, 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. As stated in final comment 103(b)–1, in no way are the exclusions in final § 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, firm offers of credit, and other evaluations or offers initiated by the financial institution. The Bureau is adding new comment 103(a)–4 to clarify that the term covered application does not include solicitations, firm offers of credit, and other evaluations or offers initiated by the financial institution because the business has not made a request for credit, and to provide illustrative examples. The Bureau is adding this comment in response to comments from industry urging the Bureau to exclude “preapprovals,” which the commenters described as credit offered by the financial institution without an initiating application from the business. The Bureau agrees with commenters who urged that solicitations, reviews, or evaluations initiated by the financial institution should not, on their own, be considered “covered applications” because the communications do not involve an applicant requesting credit. Excluding solicitations and firm offers of credit is also consistent with the language of ECOA section 704B(b)(1), which expressly contemplates 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.

The Bureau does not agree, however, that such offers or evaluations should not be reported even where the applicant responds to such a request and seeks the credit offered, as suggested by one commenter. Once the applicant responds affirmatively to the solicitation indicating that it wishes to proceed, there is a request for credit from the applicant; there is no requirement in the final definition of a covered application that the applicant be the initiating entity, only that the applicant make an oral or written request for a covered credit transaction in accordance with procedures used by a financial institution for the type of credit requested. Capturing such requests would also implement the language of ECOA section 704B(b)(1), which provides that data collection and reporting is required “whether or not such application is in response to a solicitation by the financial institution.” The commenter also argued that reporting on accepted solicitations or offers would skew the data as it would only include accepted offers. The Bureau understands that this may result in some data skew, but believes this outcome is preferrable to having no data at all on applicant requests for credit in response to a solicitation. Thus, solicitations, firm offers of credit, or other evaluations or offers initiated by the financial institution for a covered credit transaction may become a “covered application” if an applicant responds to the solicitation or offer by requesting the offered credit. However, if a financial institution unilaterally—with no request from the business—increases a credit line or provides some other type of credit to the business, it would not be considered a covered application because, similar to a mere solicitation, the transaction does not involve a request for credit.

Several commenters also asked the Bureau to provide that “preapprovals” are not covered applications. As noted above, to the extent the commenters are referring to evaluations or offers initiated by the financial institution alone, such events are not covered applications unless the applicant affirmatively responds, wishing to proceed. However, a preapproval as described in existing comment 2(f)–5.i is an example of a covered application. 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.

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.” 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. As discussed in detail below, the Bureau is finalizing its proposal 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 have defined the term “covered credit transaction” as an extension of business credit that is not an excluded transaction under proposed § 1002.104(b). Proposed comment 104(a)–1 would have reiterated that 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). The Bureau explained that such credit transactions for agricultural purposes and HMDA-reportable transactions would have fallen within the scope of the proposed rule. The Bureau noted that this was not an exhaustive list of covered credit transactions; other types of business credit would have constituted covered credit transactions unless excluded by proposed § 1002.104(b). With respect to excluded transactions, proposed § 1002.104(b) would have stated that the requirements of subpart B do not apply to trade credit, public utilities credit, securities credit, and incidental credit. Proposed commentary would have made clear that the term “covered credit transaction” also did not cover factoring, leases, consumer-designated credit used for business purposes, or credit secured by certain investment properties.

The Bureau received comments on transaction coverage from many lenders, trade associations, business advocacy groups, nonbank online lenders, the offices of two State attorneys general, and community groups. The Bureau received a few comments from industry expressing general support for the proposed definition of covered credit transaction. Many community groups, as well as several community-oriented lenders and a cross-sector group of lenders, community groups, and small business advocates, requested expansive and broad product coverage; some commenters argued that such coverage was needed to prevent evasion, for comprehensive data analysis, and/or to fulfill section 1071's statutory purposes. Some commenters suggested the Bureau monitor the market to ensure that new products are covered by, and reported under, the rule. A business advocacy group and a joint letter from community groups, community-oriented lenders, and business advocacy groups urged the Bureau to subject “all forms of credit”—including merchant cash advances, factoring, and leases, in addition to term loans, credit cards, and other forms of credit—to fair lending and credit need analysis. They asserted that each of these products occupies a substantial portion of the “credit market” for small businesses and excluding any of them would allow potentially detrimental lending practices to proliferate.

For the reasons set forth herein, the Bureau is finalizing its definition of “covered credit transaction” in § 1002.104(a) as proposed. Final § 1002.104(a) defines the term “covered credit transaction” as an extension of business credit that is not an excluded transaction under § 1002.104(b). Final comment 104(a)–1 reiterates that the term “covered credit transaction” includes all business credit (including loans, lines of credit, credit cards, and merchant cash advances) unless otherwise excluded under final § 1002.104(b). Loans, lines of credit, credit cards, merchant cash advances, and credit products used for agricultural purposes fall within the scope of this final rule, which covers the majority of products that small businesses use to obtain financing. As discussed in greater detail below, the Bureau believes that covering these products in this rule is important to fulfilling the purposes of section 1071. The Bureau stresses that the products discussed herein do not constitute an exhaustive list of covered credit transactions; other types of business credit not specifically described in the rule and its associated commentary nevertheless constitute covered credit transactions unless excluded by final § 1002.104(b). In line with this approach, the Bureau thus is not expressly listing other products (such as credit extensions incident to factoring arrangements discussed below) as covered credit transactions.

Final § 1002.104(b), in turn, states that the requirements of subpart B do not apply to trade credit, HMDA-reportable transactions, insurance premium financing, public utilities credit, securities credit, and incidental credit. Associated commentary makes clear that the term “covered credit transaction” also does not cover factoring, leases, consumer-designated credit that is used for business or agricultural purposes, or credit transaction purchases, purchases of an interest in a pool of credit transactions, and purchases of a partial interest in a credit transaction. In response to comments received, the Bureau is now excluding HMDA-reportable transactions and insurance premium financing from the scope of this final rule. As a result, the Bureau believes that proposed commentary that would have made clear that the term “covered credit transaction” does not cover credit secured by certain investment properties is not necessary.

The Bureau agrees that broad product coverage is important to fulfill section 1071's statutory purposes, though the Bureau is not extending coverage to all forms of small business financing as requested by some commenters. The Bureau believes the exclusions from the definition of covered credit transaction that it proposed in § 1002.104(b) are appropriate and has added two additional exclusions (HMDA-reportable transactions and insurance premium financing) in response to comments received. For the reasons set forth herein, the Bureau is finalizing § 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.

Comments received on specific types of transactions that are reportable or not reportable under this rule are discussed in turn below.

Loans, Lines of Credit, and Credit Cards

Proposed Rule

Proposed § 1002.104(a) would have defined the term “covered credit transaction” as an extension of business credit that is not an excluded transaction under proposed § 1002.104(b). Proposed comment 104(a)–1 would have reiterated that 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). The Bureau did not propose definitions for loans, lines of credit, and credit cards because the Bureau believed these products are generally and adequately covered by the definition of “credit” in proposed § 1002.102(i), which, as noted above, references existing § 1002.2(j). The Bureau sought 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.

Comments Received

A few commenters expressed general support for the explicit coverage of loans, lines of credit, and credit cards. One bank commenter opined that the Bureau's rule does not need to define loans, lines of credit, and credit cards because those definitions would add unnecessary complexities. One community group expressed approval for the Bureau's proposed coverage of lines of credit, stating that such products meet important credit needs to help businesses weather fluctuations in revenues and their coverage will help inform stakeholders whether minority- and/or women-owned businesses are able to access this important credit type or whether they experience a disproportionate amount of denials.

The Bureau received mixed feedback regarding its proposed coverage of credit cards. A few community groups supported credit card coverage, with one noting that credit cards are widely used by small businesses, often with smaller principal balances and higher interest rates than term loans. This commenter stressed the importance of assessing whether Hispanic- and African American-owned businesses are more likely to rely upon credit cards than other businesses and whether the smallest businesses, and women- and minority-owned businesses, have equitable access to term loans or are served disproportionately by credit card loans or other credit products.

By contrast, a few credit union trade associations urged the Bureau to exclude credit cards from the rule to reduce burden and reporting volumes. One commenter argued that every credit union that offers even a single small business credit card product will ultimately become a covered financial institution unless the Bureau either establishes a de minimis threshold or expressly excludes small business credit cards. Another urged the Bureau to exclude credit cards from the rule on the basis that these products are already covered by the Credit Card Accountability Responsibility and Disclosure (CARD) Act and the exclusion would reduce compliance burden without weakening the quality of resulting data and would relieve lenders of the responsibility to sort out and isolate business credit card data from consumer credit card data, which are often both run by the same platform independently of other commercial lending activities.

Final Rule

For the reasons set forth herein, the Bureau is finalizing its coverage of loan, lines of credit, and credit cards as proposed. 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). According to a recent Federal Reserve Banks' survey of employer firms, loans and lines of credit were the most common forms of financing sought by applicants, with credit cards in second place. The Bureau believes that covering these products is important for advancing both of section 1071's statutory purposes.

The Bureau does not believe that it would be appropriate to exclude credit cards from coverage, as requested by several commenters. The Federal Reserve Banks found that almost one third of employer firm applicants sought credit cards and credit card usage among minority-owned small businesses is higher than among white- owned small businesses. The Bureau believes that excluding this popular source of small business financing, particularly among the smallest businesses and start-ups, would not be consistent with section 1071's statutory purposes. The Bureau has considered the concerns regarding reporting volumes among credit unions and notes that its higher originations threshold in final § 1002.105(b) for coverage under the rule should help alleviate these concerns. The Bureau does not believe that CARD Act reporting is a sufficient substitute for data collected under section 1071 because it does not cover business-purpose credit cards and does not include protected demographic information, both of which are central to section 1071's statutory purposes.

The Bureau is finalizing § 1002.104(a) and comment 104(a)–1 as proposed. The Bureau is not adopting definitions for loans, lines of credit, and credit cards because it believes these products are generally and adequately covered by the definition of “credit” in § 1002.102(i).

Merchant Cash Advances

Background and Proposed Rule

As discussed above, proposed § 1002.104(a) would have defined the term “covered credit transaction” as an extension of business credit that is not an excluded transaction under proposed § 1002.104(b), and proposed comment 104(a)–1 would have reiterated that 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). The Bureau sought comment on its proposed approach to covered credit transactions, and in particular, on whether it should define merchant cash advances and/or other sales-based financing transactions, and if so, how.

As the Bureau explained in the NPRM, merchant cash advances are a form of financing for small businesses that purport to be structured as a sale of potential future income. Merchant cash advances vary in form and substance, but under a typical merchant cash advance, 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 merchant cash advance provider until the agreed upon payment amount is satisfied. Merchant cash advance contracts often provide for repayment directly through the merchant's card processor and/or via Automated Clearing House withdrawals from the merchant's bank account. Merchant cash advances constitute the primary product under an umbrella term often referred 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.

The Bureau understands that the merchant cash advance market is generally dominated by nondepository institutions not subject to Federal safety and soundness supervision or reporting requirements. The Bureau also understands that merchant cash advance providers may not be required to obtain State lending licenses. As a result, information on merchant cash advance lending volume and practices is limited. The Bureau notes, however, that a few states have enacted laws that would impose disclosure requirements upon certain commercial financing providers, including merchant cash advance providers.

Although the Bureau's 2017 White Paper estimated the merchant cash advance 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, the Bureau notes that more recent evidence suggests the industry may now be much larger. For example, the 2021 Federal Reserve Banks' survey of firms with 1–499 employees (“employer firms”) found that 8 percent of such businesses applied for and regularly used merchant cash advances. Moreover, on August 18, 2019, the trade website deBanked reported that according to an investment bank's projections, “the [merchant cash advance] 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.”

The Bureau understands that merchant cash advances are often used by merchants due to the speed and ease with which they can be obtained, particularly for merchants unable to obtain financing from more traditional sources. According to the 2021 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 merchant cash advances (14 percent, 10 percent, and 10 percent, respectively) than white-owned firms (7 percent).

The Bureau believes that the higher frequency of merchant cash advance use among minority-owned businesses coupled with reports of problematic provider practices lends credence to claims that merchant cash advances may raise fair lending concerns. The Federal Trade Commission (FTC) released a Staff Perspective in February 2020 discussing its concerns with the merchant cash advance industry and noting the industry's tendency to “cater to higher-risk businesses or owners with low credit scores—typically offering them higher-cost products.” The FTC has also filed enforcement actions against merchant cash advance providers and their principals, in one case alleging that they misrepresented the terms of merchant cash advances that they provided, and then used “unfair collection practices, including sometimes threatening physical violence, to compel consumers to pay.” In April 2021, the FTC obtained a settlement that required a merchant cash advance provider to pay more than $9.8 million to settle charges that it took money from businesses' bank accounts without permission and deceived business owners about the amount of financing they would receive and about other features of its financing products. More recently, the FTC obtained a court order that permanently bans a merchant cash advance company and its owner from the merchant cash advance industry for deceiving and threatening small businesses and their owners.

Moreover, the Bureau understands that the delinquency/default rate amongst small businesses that use merchant cash advances is relatively high—6 to 20 percent according to one estimate and 10 percent according to an SEC analysis of one merchant cash advance provider (compared with a charge off rate between 0 to 3.59 percent on SBA loans and just over 1 percent on certain commercial and industrial loans ). The Bureau believes this high default rate may be explained by the fact that the typical merchant cash advance holdback percentage—10 to 20 percent of gross receipts or revenues—may be onerous for already cash-strapped small businesses. The Bureau also understands that it is not uncommon for small businesses that use merchant cash advances to obtain new merchant cash advances from other merchant cash advance providers (more than a quarter of such businesses, by one account); they also may use one merchant cash advance 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.”

As small businesses struggled with the COVID–19 pandemic, reports of merchant cash advance providers employing aggressive collection practices continued, such as “pursuing legal claims against owners that freeze their bank accounts and . . . pressing their family members, neighbors, insurers, distributors—even their customers.” Given the fact that 84 percent of the credit applicants surveyed by the Federal Reserve Banks were approved for a merchant cash advance and the fact that it appears to have been significantly more difficult to obtain credit as a “high credit risk” applicant during the COVID–19 pandemic, the Bureau believes that many vulnerable small businesses sought merchant cash advances to support their pandemic recovery.

Comments Received

The Bureau received comments on this aspect of the proposal from a wide range of lenders, trade associations, business advocacy groups, community groups, individuals, the offices of two State attorneys general, and others. The Bureau observes that, throughout the development of the rule to implement section 1071, merchant cash advances 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 merchant cash advances in the rule. Comments received in response to the NPRM were no different in that, with the exception of a sole credit union trade association, the only commenters that supported the exclusion of merchant cash advances from the rule were merchant cash advance providers or trade associations representing merchant cash advance providers (the Bureau is not aware of any credit unions that offer merchant cash advances as that term is used herein). Most of these commenters argued that merchant cash advances do not meet the definition of credit under ECOA or State law and should instead be treated like traditional factoring arrangements (described in detail below), which are generally understood not to be credit. A few of these commenters also asserted that covering merchant cash advances is contrary to public policy because doing so will negatively impact access to financing and because they benefit businesses. Two commenters asserted that the Bureau failed to engage adequately in cost/benefit analysis as required by section 1022(b)(2)(a) of the Dodd-Frank Act, claiming that some smaller funders would exit the market due to increased regulatory burdens and costs. One commenter explained that because the merchant cash advance industry has never had to track the demographic status of a small business owner, implementing the Bureau's rule would require costly programming upgrades, adjustments to merchant cash advance funder systems, and additional employees to handle the reporting and auditing of these functions. This commenter also argued the rule would result in a less competitive market dominated by larger players and would put merchant cash advances at an unfair disadvantage compared to factoring.

The Bureau received many comments, primarily from community groups and community-oriented lenders, expressing broad support for covering merchant cash advances. A few of these commenters pointed to the fact that State regulators have started cracking down on the merchant cash advance industry due to its lack of transparency and potentially predatory practices. A community group and a cross-sector group of lenders, community groups, and small business advocates noted that merchant cash advances are an important and growing part of small business financing, with the community group relaying one merchant cash advance provider's announcement that the COVID–19 pandemic created new demand for its products, in part because the kinds of smaller firms that it primarily serves encountered greater-than-normal challenges to accessing capital through traditional bank financing during the pandemic. The cross-sector group and another community group stressed a need for transparency and noted that there is insufficient data on merchant cash advances. The community group acknowledged that reporting on merchant cash advances may be more complex due to their different terms but argued that these features make transparency into this lending channel critical. This commenter also opined that excluding merchant cash advances from scrutiny would encourage lenders to “double down” on their use rather than offer more consumer-friendly products.

Several supporters of merchant cash advance coverage, including the offices of two State attorneys general, maintained that merchant cash advances are clearly credit and they incur repayment liability. A joint letter from community and business advocacy groups explained that merchant cash advances are distinct from factoring in that a genuine factoring transaction creates a completed sale of receivables owed to the seller as a result of goods delivered or services provided by the seller to a third party. A few commenters asserted that coverage of merchant cash advances meets section 1071's statutory purposes. One online lender noted that merchant cash advances are not regulated. Many commenters expressed strong concerns about high costs and predatory practices often associated with merchant cash advances, with the majority of these commenters expressing particular concern about use of merchant cash advances among minority business owners. A CDFI lender explained that it had analyzed several merchant cash advance and balance sheet lender agreements provided by its clients and discovered that the average product carried an annual percentage rate of 94 percent, with one product reaching 358 percent. This commenter also found that, among the Hispanic borrowers in its sample, the average monthly payment was more than 400 percent of their take-home pay. An online lender characterized the lack of transparency in pricing merchant cash advances as a significant market failure that harms small business owners. A community group expressed strong concerns about the increasingly common practice of using confessions of judgments (where a borrower must agree to allow the lender to obtain a legal judgment without going to court) within merchant cash advance lending, citing an investigation that found that the number of merchant cash advance cases ending with a confession in favor of a merchant cash advance provider in New York State rose from 14 cases in 2014 to over 3,500 cases in 2018. The commenter noted that the study further found that these confession of judgment cases won the merchant cash advance industry an estimated $500 million in 2017.

Potential coverage of merchant cash advances under the final 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 a merchant cash advance 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 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 merchant cash advances. The FTC comment letter urged 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 recommended that the Bureau help small businesses through data collection, collecting complaints, and education.

In response to the NPRM, the offices of two State attorneys general submitted a comment stating that merchant cash advance transactions fall within the definition of credit and that the inclusion of merchant cash advance transactions is crucial given the rapid expansion of the merchant cash advance market in the past decade and limited publicly available data on market size or standard industry practices. Having brought enforcement actions against multiple merchant cash advance providers, they also asserted that the unregulated nature of the merchant cash advance market makes it ripe for the type of problematic practices that they have directly observed through their investigations into the industry. They expressed strong support for the inclusion of merchant cash advance transactions within the scope of the Bureau's rule, stating their belief that the rule will promote fairness, transparency, and enhanced data collection in the area of small business financing, including the rapidly growing merchant cash advance market that is targeting small businesses.

The Bureau also received a few comments about other aspects of its proposal to cover merchant cash advances. One commenter advised against defining merchant cash advances in the rule, arguing that such a definition could be inconsistent with some State laws and thus may create additional complexity in complying with the final rule. Another commenter urged the Bureau to clarify the application of the rule to merchant cash advances, including by clearly defining merchant cash advances and explaining how the rule will apply to the particular features of merchant cash advance products. Two commenters expressed more general support for coverage of sales-based financing.

Final Rule

For the reasons set forth herein, the Bureau is finalizing its definition of “covered credit transaction” as proposed. Final § 1002.104(a) defines the term “covered credit transaction” as an extension of business credit that is not an excluded transaction under § 1002.104(b). Final comment 104(a)–1 reiterates that the term “covered credit transaction” includes merchant cash advances.

The Bureau believes that the statutory term “credit” in ECOA is intentionally broad so as to include a wide variety of products without specifically identifying any particular product by name. 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.” As a result, the definition does not explicitly state that it applies to any type of credit, whether it be installment loans, credit cards, or merchant cash advances. To the extent there is any ambiguity about whether a particular product constitutes “credit,” Congress appears to have intended for the Bureau (or previously, the Board) to fill that gap, but neither the Bureau nor the Board have had occasion to provide further clarity with respect to coverage of sales-based financing products like merchant cash advances except to note in commentary that factoring, as “a purchase of accounts receivable,” is not covered by ECOA or Regulation B. However, based on its review of typical merchant cash advance arrangements and its expertise with respect to the nature of credit transactions, the Bureau believes the term “credit” encompasses merchant cash advances and other types of sales-based financing. As a result, the Bureau believes that merchant cash advances and other sales-based financing are covered by the definition of “credit” in final § 1002.102(i). The Bureau does not believe it is necessary to specifically define merchant cash advances or sales-based financing because the broad definition of “credit” in ECOA and Regulation B—includes credit products covered by the rule unless the Bureau specifically excludes them.

Nor does the Bureau believe that merchant cash advances should be excluded from the rule as a species of factoring because merchant cash advances do not constitute factoring within the meaning of the existing commentary to Regulation B or the definition in final comment 104(b)–1. 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 a merchant cash advance, the recipient of the financing has no existing rights to payment that it can transfer. The transaction thus constitutes only a promise by the recipient to transfer funds to the provider 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.

The Bureau does not agree with arguments raised by other commenters that merchant cash advances are not “credit” under ECOA. Specifically, the Bureau does not agree that the purchase of the right to a specific portion of a merchant's future proceeds, up to an agreed-upon limit, constitutes a substantially contemporaneous exchange of value between a merchant cash advance provider and a merchant. The Bureau notes that a merchant's proceeds from future sales of goods and services, by definition, do not exist in the present and thus there can be no contemporaneous exchange of value, substantial or otherwise, where there is no present right to payment. The Bureau believes merchant cash advances are clearly distinguishable from back-dated checks, service contracts with staggered payment schedules, and true leases (discussed below). Merchant cash advances are typically repaid over a period of three to 12 months and the merchant has no existing rights to payment that it can transfer to the merchant cash advance provider until they materialize at a later date, usually at least a month later. The Bureau also notes that under Regulation B, a transaction is “credit” if there is a right to defer payment of a debt—regardless of the number of installments required for repayment or whether the transaction is subject to a finance charge.

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 absence of recourse or analysis of who bears the risk of loss. Merchant cash advance 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 merchant cash advances 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 merchant cash advances, repayment in regular intervals over a predictable period of time).

Finally, the Bureau believes that the inclusion of merchant cash advances in the Bureau's rule is important to fulfilling both the fair lending and the business and community development purposes of section 1071. Commenters have warned of high costs and predatory practices in this area, and the Bureau is particularly focused on their increasingly prevalent use among minority business owners. The Bureau also believes that including merchant cash advances will create a more level playing field across financial institutions that provide cash flow financing to small businesses by shedding light on such credit transactions as well as create a dataset that better reflects demand for such financing by the smallest and most vulnerable businesses.

Agricultural-Purpose Credit

Background

As reported by the 2017 Census of Agriculture, 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 2020. Small family farms (less than $350,000 in gross cash farm income) accounted for 90 percent of all U.S. farms and large-scale family farms ($1 million or more in gross cash farm income) make up about 3 percent of farms but 44 percent of the value of production.

According to the 2020 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 enterprises regulated by the Farm Credit Administration, an independent government agency. 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.

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 is limited, and suggested that this rulemaking may be a way to engage in “additional data collection and reporting for nonmortgage loans.” The GAO found that, using 2015–2017 USDA survey data, socially disadvantaged farmers and ranchers represented an estimated 17 percent of primary producers in the survey, but accounted for only an estimated 8 percent of total outstanding agricultural debt. Loans to purchase agricultural real estate accounted for most of socially disadvantaged farmers and ranchers' outstanding debt (67 percent). Farms with minority or women primary producers are, on average, smaller and bring in less revenue than farms with a non-socially disadvantaged primary producer ( i.e., a white male)—while socially disadvantaged farmers and ranchers represented 30 percent of all farms, they operated 21 percent of total farmland and accounted for 13 percent of the market value of agricultural products sold in 2017.

The share of minority representation in farming, particularly that of Black farmers, has declined sharply over the last 100 years. (The number of female producers has increased significantly over the last 100 years but remains relatively small compared to male farm producers. ) Based on the disposition of numerous lawsuits alleging discrimination against minority farmers, the Bureau believes that credit discrimination may play a role in this decline. The GAO cites advocacy groups for socially disadvantaged farmers and ranchers, which have said some socially disadvantaged farmers and ranchers face actual or perceived unfair treatment in lending or may be dissuaded from applying for credit because of past instances of alleged discrimination. In addition, the GAO cites advocacy groups, lending industry representatives, and Federal officials in stating that socially disadvantaged farmers and ranchers 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. 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, and believes that there are heightened fair lending risks in agricultural lending.

Proposed Rule

In its proposal, the Bureau noted that credit used for agricultural purposes is generally covered by the broad definition of credit under ECOA and agricultural businesses are included in section 1071's definition of small business. Taking into account the information above, the Bureau stated that covering agricultural credit in this rulemaking was important for advancing both of section 1071's statutory purposes and did not propose defining covered credit in a way that would exclude agricultural credit from coverage. The Bureau sought comment on the potential costs and complexities associated with covering such credit.

Comments Received

The Bureau received comments on this aspect of the proposal from many agricultural lenders, banks, trade associations, and community groups. Several community-oriented lenders and many community groups voiced support for the Bureau's proposed coverage of agricultural-purpose credit. A joint letter from community groups, community oriented lenders, and business advocacy groups asserted that covering agricultural credit will be helpful in advancing the goals of section 1071 because the vast majority of farms are small and family run, and farmers are an important part of the community development landscape, and because the litigation regarding discrimination against Black farmers shows the risk of discrimination and unequal access is significant in the agricultural context. A rural community group argued that the Bureau's legislative mandate is clear on this issue because agricultural lending falls under ECOA's definition of credit and farming operations are correctly included in the proposed rule's definition of small business. Several commenters asserted that covering agricultural credit serves section 1071's community development and fair lending statutory purposes. Another community group expressed its belief that 1071 data will allow for promotion of adaptive and sustainable agriculture among smaller farmers as opposed to relying on large agricultural businesses.

Some commenters discussed their belief that including agricultural credit within the scope of this rule was needed to address historical and/or continuing discrimination. A rural community group described the challenges relating to justifying claims in the discrimination settlements against USDA due specifically to the lack of any other form of data to quantify the results of disparities in treatment with access to loans. This commenter also relayed minority farmers' experiences of being more at risk of foreclosure due to not being told about or not being given fair access to many farm programs that benefit white farmers and due to receiving unfavorable loans originated with the specific intent of pushing these farmers into acceleration and foreclosure to remove them from their land. This commenter also detailed how the rule would illuminate a host of factors leading to disparate treatment of minority farmers, citing conflicts of interest among staff of local Farm Service Agency offices, disclosure of loan terms, imposition of collateral requirements, and changes in valuations of assets in appraisals. This commenter described discouragement of minority farmers from making loan applications or requesting loss mitigation and asserted that data collection is a proven way to document and address such discouragement. The commenter alleged that agricultural lenders, notably Farm Credit System lenders, lack the data or any system to comply with ECOA.

One community group maintained that constrained access to capital has contributed to the staggering loss of Black-owned farmland in the Deep South, while another said that the Bureau's rule will highlight the racially disparate impact of facially neutral policies that disproportionately result in adverse outcomes for Black farmers, including underwriting decisions based on the types of farm, the business structure, and land appraisals. A CDFI lender relayed examples of issues faced by Black farmers, including: (1) lack of access to fair, affordable credit as a barrier for new farmers; (2) lenders and local USDA offices that seek to frustrate Black farmers by making things more complicated and causing lengthy delays that white farmers do not encounter; (3) lack of relationships with banks resulting in their being less willing to work with the farmers and provide assistance during the loan application process; (4) agricultural loan underwriting criteria that favor beef, cattle, and grain production, which are often the enterprises of large-scale white farmers; (5) alternative financing from a private lender not being an adequate substitute for having fair access to government lending programs with 1 percent interest and 40 year terms; and (6) Black farmers often being unable to secure financing and thus being left with no choice but to sell their land to white farmers.

Several commenters stressed the need for transparency due to lack of sufficient data on agricultural lending markets. One such commenter noted that the USDA has not made its limited data—which includes only numbers of loans applied for, made, and denied, at the county level—easily available to the public. This commenter also argued that comprehensive data are particularly important to increase equity and uniformity in loan modifications and restructurings and to assist with decisions related to pandemic relief programs and the grant of specialized loan servicing. Another commenter suggested that 1071 data would help the USDA, the SBA, and other relevant government agencies better understand the needs of small agricultural businesses and noted that agricultural credit extends beyond acquisition of inventory farmland to include operational loans, agricultural machinery and building loans, and loans to develop local markets for selling agricultural products. A community group dismissed concerns that agricultural lending data would be too complex to collect and report, because it is already reported under CRA.

Some commenters suggested changes and clarifications related to applying the Bureau's rule to agricultural credit. One community group suggested the Bureau modify or clarify data collection to identify forms of disparate treatment unique in small-scale farm operations that may differ from other small businesses. This commenter also suggested that the Bureau clarify that the rule covers the Farm Service Agency, the Farm Credit System, all lenders making Farm Service Agency guaranteed loans, and the full range of other entities that provide credit to small farm businesses. A number of Farm Credit System lenders expressed support for a trade association letter that discussed how agricultural lending is fundamentally different from small commercial lending and requested a different small business definition to account for how they would be disproportionately covered by the rule. These comments are discussed in more detail in the section-by-section analysis of § 1002.106(b). One agricultural community group suggested that base acre payment transactions (transactions that take into account certain government payments, which are in turn based on a farm's historic crop yield) should be considered covered credit transactions because of concerns that base program acres may not benefit Native American farmers and because base acre payments are often used to prove or deny a farmer's request for loan origination or modification.

Some industry commenters requested an exclusion for agricultural credit from the Bureau's rule. One credit union association argued that agricultural lending should be exempted because many agricultural borrowers are serviced by small local community financial institutions, including credit unions whose members are agriculturally based and whose members and borrowers are represented on the credit unions' board of directors. A few other commenters asserted that agricultural credit is not comparable to other types of small business lending and urged the Bureau to exempt it on those grounds; one stated that it does not make sense to compare a 200-acre farm with a gas station. A trade association pointed to different treatment under CRA and HMDA as evidence that it was unlikely that section 1071 was enacted to cover agricultural lending because their underwriting criteria are distinct and different from small business loans. A bank also suggested exempting agricultural lending, maintaining that its numbers would not be useful for fair lending purposes because unlike small business loans that are more on a one loan to one borrower or two-to-one basis, its agricultural portfolio included multiple loans to the same borrower. A few commenters argued that covering agricultural credit under the rule would have an outsized impact on farmers by increasing this cost of credit and reducing its availability. A trade association asserted that the burden of section 1071 compliance may force small lenders to reduce their lending below the exemption threshold, which in turn may limit the access to agricultural credit because large banks often do not engage in significant agricultural lending.

Final Rule

For the reasons set forth herein, the Bureau is not defining a “covered credit transaction” in final § 1002.104 in a way that would exclude agricultural credit from the final rule. Credit used for agricultural purposes is generally covered by the broad definition of credit under ECOA. First, ECOA's definition of “credit” is not limited to a particular use or purpose and Regulation B expressly covers agricultural-purpose credit. Further, ECOA does not provide an exception for agricultural credit, and it assigns enforcement authority to regulators of agricultural lending such as the Secretary of Agriculture and the Farm Credit Administration. Moreover, agricultural businesses are included in section 1071's statutory definition of small business. The Bureau believes that covering agricultural credit in this rulemaking is important for advancing both of section 1071's statutory purposes and is not excluding agricultural credit from the final rule. The Bureau notes that most of the comments received on this aspect of the proposal were in favor of the rule covering agricultural lending. Even the many comments that the Bureau received from Farm Credit System lenders and related associations generally focused on urging the Bureau to adopt a separate small farm definition rather than a wholesale exclusion of agricultural credit.

As noted above, the products discussed in this rule do not constitute an exhaustive list of covered credit transactions; other types of business credit not specifically described in the rule and its associated commentary nevertheless constitute covered credit transactions unless excluded by final § 1002.104(b). In line with this approach, the Bureau thus is not delineating certain products (such as base acre payment transactions) as covered credit transactions.

The Bureau does not believe it would appropriate to exclude agricultural credit from the rule, as requested by some commenters. With regard to the concern that agricultural lending should be exempted because of the impact on small local community financial institutions, such as credit unions, the Bureau notes that it is increasing its institutional coverage threshold, as discussed in the section-by-section analysis of § 1002.105 below, to limit any risk of impact on smaller financial institutions or of market disruption in the small business lending sector. By declining to draw a potentially blurry line between business-purpose credit and agricultural-purpose credit, the Bureau also believes that its finalized inclusive approach will better enable it to ensure that financial institutions that are offering business credit are complying with the final rule.

With respect to comments asserting that agricultural credit is unique and not comparable to other types of small business lending, the Bureau acknowledges that every small business industry has its own unique characteristics. In order to fulfill section 1071's business and community development purpose and to address the particularities of certain lending models, the Bureau is providing clarification regarding how reporting rules apply to certain covered credit transactions and is also not covering certain transactions. For the reasons described herein, however, the Bureau is not categorically exempting agricultural credit from the rule.

Moreover, the Bureau believes that data on agricultural credit will be useful for fair lending purposes. As discussed above, there is some evidence that minority-owned farms may obtain, or may be offered, higher interest rates and less favorable terms on agricultural credit. Data collected and reported under this final rule will allow the Bureau, other government agencies, and other data users to have insight into the existing market, observe the market for potentially troubling trends, and conduct fair lending analyses.

The Bureau has considered the comments arguing that covering agricultural credit under the rule would have an outsized impact on farmers by increasing this cost of credit and reducing its availability. The Bureau has also considered the claim that small lenders will reduce their lending below the exemption threshold, which in turn may limit the access to agricultural credit because large banks often do not engage in significant agricultural lending. The Bureau does not believe that there is a significant risk that lenders will reduce their agricultural lending as a result of this rule such that there will be a marked impact on the availability of agricultural credit. Moreover, as noted in the section-by-section analysis of § 1002.105 below, the Bureau is increasing its institutional coverage threshold for the final rule to reduce the impact on financial institutions with the lowest volume of small business lending, including agricultural lenders.

Based on its review of the GAO Report, the decline of minority representation in farming over the last 100 years, the disposition of numerous lawsuits alleging discrimination against minority farmers, and comments discussing how the inclusion of agricultural credit in the rule is needed to address historical and/or continuing discrimination, the Bureau finds that covering agricultural credit is crucial to serving section 1071's purpose of facilitating enforcement of fair lending laws.

The Bureau furthers finds that covering agricultural credit is vital to enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of small businesses, including small farms. The Bureau agrees with commenters that stressed the need for transparency due to lack of sufficient data on agricultural lending markets. The Bureau believes that the transparency afforded by data collected and reported under this final rule will empower rural communities to better address the challenges they face, particularly with regard to equitable credit access. Representatives of these communities appear to agree—in a recent letter addressed to the House and Senate Agriculture and Financial Services and Banking committees characterizing the proposed rule as “pro-farmer,” multiple community groups noted that “[s]mall farmers have consistently demanded more transparent and fair markets, and our members know that having an accurate and up-to-date picture of agricultural lending will help farmers and consumers, not hurt them.” Relatedly, in a recent report, the Bureau found that rural communities face unique challenges in accessing and using consumer financial products and that further research is required to better understand the needs of rural households and how the Bureau can best ensure that rural residents have equitable access to financial markets.

The Bureau notes that many agricultural lenders have already been collecting and reporting some form of data by HMDA, the CRA, and/or the Farm Credit Administration and so should be able to adapt to the data collection requirements mandated by Congress. Additionally, to the extent that commenters were concerned about the impact on the smallest agricultural lenders, many of those concerns are addressed by the Bureau's decision, as discussed in the section-by-section analysis of § 1002.105(b) below, to require data collection and reporting only by financial institutions that meet a 100-loan threshold. In short, as further discussed in part IX below, the Bureau does not anticipate any material adverse effect on credit access in the long or short term to rural small businesses.

104(b) Excluded Transactions

Proposed § 1002.104(b) would have provided 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 have made clear that the term covered credit transaction also does not cover factoring and leases. Proposed comments 104(b)–3 and –4 would have clarified that the term covered credit transaction does not include consumer-designated credit or credit secured by certain investment properties because such transactions are not business credit. In the NPRM, the Bureau also discussed its proposed treatment of extensions of credit made to governments or governmental subdivisions, agencies, or instrumentalities and certain purchases of covered credit transactions.

The Bureau received comments on its overall approach to § 1002.104(b) from several banks, trade associations, individuals, and members of Congress. Two industry commenters supported the exclusions as proposed, with another commenter expressing support but also suggesting expansion. Two commenters suggested listing all exclusions in the regulatory text with any clarifications of those exclusions set out in the commentary. A bank trade association urged the Bureau to extend section 1071 requirements to all nontraditional lenders and nontraditional products to avoid leaving open the opportunity for the abuse or dissatisfaction of small business borrowers to go undetected or disadvantaging highly regulated institutions such as community banks. A joint letter from several members of Congress asked the Bureau reconsider its proposed exclusions on the grounds that such exclusions would lead to a gap in understanding of the small business lending marketplace and whether entities are in compliance with fair lending laws. Comments received regarding specific exclusions, including additional exclusions sought by commenters, are discussed in greater detail below.

For the reasons set forth herein, the Bureau is finalizing § 1002.104(b) to provide that the requirements of subpart B do not apply to trade credit, HMDA-reportable transactions, insurance premium financing, public utilities credit, securities credit, and incidental credit. In response to comments received, the Bureau is excluding HMDA-reportable transactions from coverage under the final rule. As a result, the Bureau believes that proposed comment 104(b)–4 that would have made clear that the term “covered credit transaction” does not cover credit secured by certain investment properties is not necessary. Final comments 104(b)–1 and –2 make clear that the term covered credit transaction also does not cover factoring and leases. Final comment 104(b)–3 clarifies that the term covered credit transaction does not include consumer-designated credit because such transactions are not business credit. New comment 104(b)–4 provides clarification regarding certain purchases of covered credit transactions, including pooled loans, and partial interests. All of these provisions are discussed in detail below.

The Bureau has considered comments suggesting that all exclusions be listed in the regulatory text. The Bureau appreciates the need for clarity in articulating which products must be reported under this final rule but believes that it can provide sufficient clarity through its regulatory text and commentary. The Bureau's approach differentiates between products that meet the definition of both “credit” and “business credit” under Regulation B, and between those products that the Bureau is excluding (for reasons discussed below) pursuant to its exception authority under ECOA section 704B(g)(2). Products excepted under section 704B(g)(2) are enumerated in the regulatory text. Such specific exclusion is not necessary for products the Bureau considers not to be “business credit” in the first place; however, the Bureau believes that identifying and describing some such products in the commentary—which it has done—will provide clarity and facilitate compliance.

104(b)(1) Trade Credit

Background

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.” Thus, trade credit typically involves a transaction in which a seller allows a business to purchase its own goods or services without requiring immediate payment in full, and the seller is not otherwise involved in financial services and does not otherwise provide credit that could be used for purposes other than the purchase of its own goods or services. 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 or a more general credit product offered alongside the sale of their own goods or services.

Although ECOA and Regulation B generally may apply to trade credit, most of the specific notification requirements of existing Regulation B do not apply to trade credit transactions. 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. The Bureau understands that there are tens of thousands of merchants and wholesalers that extend credit to small businesses solely in connection with the sale of their goods and services.

Proposed Rule

The Bureau proposed to not cover trade credit in the section 1071 final rule. Proposed § 1002.104(b)(1) would have defined 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 have provided that an example of trade credit is one that involves a supplier that finances the sale of equipment, supplies, or inventory. Proposed comment 104(b)(1)–1 would have provided 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 have clarified 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 sought comment on its proposal to exclude trade credit from the rule and on its proposed definition of trade credit.

Comments Received

The Bureau received comments on this aspect of the proposal from a range of commenters, including banks, trade associations, and a business advocacy group. Several industry commenters expressed general support for the proposal to exclude trade credit. However, some of these commenters advocated expanding the exclusion. For instance, one commenter suggested that all asset-based financing should be excluded as trade credit, arguing that if the rule should not apply to sellers to facilitate their sales of goods, the rule also should not apply to their “behind the scenes” non-recourse factors and asset-based lenders who facilitate those sales. Two commenters urged broadening the proposed exclusion to include captive finance companies when they are financing equipment manufactured by their parent companies because these companies exist solely to facilitate the acquisition of the original equipment manufacturers' products. A few comments more broadly asked that the Bureau not limit the exclusion to “in-house” trade credit, suggesting that trade credit offered by financial institutions allows more suppliers to offer trade credit programs, and as a result provides more opportunities for credit access to small businesses. These commenters additionally argued that such expansion is needed to prevent uneven regulatory treatment, to promote competition in the market for trade credit, to avoid pushing more business transactions into a less regulated environment, and to obtain more fulsome data collection and reporting on trade credit. A trade association asked the Bureau to clarify that the trade credit exclusion encompasses auctions where a buyer may pay for acquired property at a later date.

A few other industry commenters urged the Bureau to cover trade credit in the final rule. Two of these commenters argued that providers of trade credit, especially in the agricultural sector, are competitors to traditional lenders, and should be covered. One commenter asked the Bureau to provide several specific transaction examples so that covered financial institutions can readily identify those transactions that they must report on, and those that are exempted. Another commenter asked the Bureau to clarify whether floor plan financing, which generally allows merchants to stock inventory available for sale without advance payment to the manufacturer or distributor, would fall within the proposed trade credit exclusion. This commenter noted that floor plan finance companies support merchants by allowing them to maintain some level of inventory with frequent adjustments to the financing and payment terms, and they may be affiliated with the manufacturer or distributor.

Several commenters urged the Bureau to expand its trade credit exclusion to private label or cobranded credit. These commenters primarily argued that such transactions need to be quickly completed, often at a point-of-sale, and that asking for protected demographic information and other required data may reduce the supply and demand for such credit. A few commenters suggested that if the Bureau were to include private label and co-branded transactions in the final rule, it should only require the collection and reporting of such transactions over $50,000 to mitigate the impact of their inclusion.

Final Rule

For the reasons set forth herein, the Bureau is finalizing largely as proposed its exclusion for trade credit in this final rule. Final § 1002.104(b)(1) defines trade credit as a financing arrangement wherein a business acquires goods or services from another business without making immediate payment in full to the business providing the goods or services. The Bureau has added the words “in full” to the proposed definition to account for the fact that trade credit may include an immediate partial payment or down payment to the businesses providing the goods or services. Final comment 104(b)(1)–1 provides that an example of trade credit is one that involves a supplier that finances the sale of equipment, supplies, or inventory. Final comment 104(b)(1)–1 provides that an extension of business credit by a financial institution other than the supplier for the financing of such items is not trade credit, and it also provides that credit extended by a business providing goods or services to another business is not trade credit for the purposes of subpart B where the supplying business intends to sell or transfer its rights as a creditor to a third party, such as a financial institution. Final comment 104(b)(1)–2 clarifies that the definition of trade credit under existing comment 9(a)(3)–2 applies to relevant provisions under existing Regulation B, and that § 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 adopting 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, as well as its authority under ECOA 704B(g)(2) 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 statute's requirements, as the Bureau deems necessary or appropriate to carry out the purposes of section 1071. While trade credit constitutes “credit” within the meaning of § 1002.102(i) and may constitute “business credit” within the meaning of § 1002.102(d), depending on its purpose, and therefore generally covered by ECOA, the Bureau believes that trade credit is different from products like loans, lines of credit, credit cards, and merchant cash advances and that there are several reasons to exclude it from coverage. The Bureau does not believe it would be appropriate to include trade credit in the scope of this final rule, despite some commenters' assertions that providers of trade credit in the agricultural sector would have a competitive advantage over other lenders.

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 or services, rather than offering credit as a stand-alone financial product or as more general credit product offered alongside the sale of their own goods or services. The Bureau believes that while trade creditors might meet the definition of a financial institution under § 1002.105(a), they are not primarily financial services providers, nor do they have the infrastructure needed to 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; these entities, in particular, may incur large costs relative to their size to collect and report small business lending data in an accurate and consistent manner. Taken together, requiring trade credit to be reported under subpart B could lead to significant data quality issues. The Bureau also wants to avoid the risk that the fixed costs of coming into compliance with the rule could lead these businesses to limit offering trade credit to their small business customers, which may run contrary to the business and community development purpose of section 1071. These concerns are distinct from coverage generally under ECOA and Regulation B, which as noted above may still apply to trade credit.

The Bureau does not believe that the trade credit exclusion should be expanded to include all asset-based financing, captive finance companies, or trade credit offered by financial institutions that are not suppliers of goods or services, as requested by some commenters. The Bureau believes that, unlike trade creditors themselves, such providers offer stand-alone credit products in the same way as other financial institutions and are not retailers or merchants with limited regulatory compliance experience. As such, the Bureau does not have the same concerns about data quality or reduced small business lending by affiliates and facilitators that it does about trade creditors themselves. Thus, the Bureau is finalizing its definition of trade credit in § 1002.104(b)(1) to focus on the business providing the goods or services being financed. The trade credit exclusion 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. Thus, provided that they otherwise meet the definition of a covered financial institution in § 1002.105(b), such affiliates and facilitators must collect and report data under the rule.

The Bureau also is not making further revisions to the regulatory text or commentary. With respect to the suggestion that the Bureau clarify that the trade credit exclusion encompasses auctions, the Bureau notes that because auction houses generally do not supply equipment, supplies, or inventory but rather facilitate sales for others, they do not offer trade credit under final § 1002.104(b)(1). However, other exclusions, such as the exclusion for incidental credit discussed below, may apply to such transactions. The Bureau is not adding further transaction examples, as only one comment requesting such additions and it otherwise appears that commenters understood that the proposed exclusion was intended to narrowly cover credit directly extended by the supplier of goods and services. Regarding floor plan financing, the Bureau notes that under final § 1002.104(b)(1), the trade credit exclusion applies where the manufacturer or distributor is financing its own inventory, but not where a financial institution is providing the financing and receiving payment.

The Bureau is also not expanding the trade credit exclusion to cover private label or cobranded credit transactions, which are credit transactions (typically, credit cards, but also revolving lines of credit and installment loans) that are originated at or facilitated by financial institutions through retailers either in-store or through a website. Moreover, as explained in the section-by-section analysis of § 1002.107(a)(5), the Bureau believes it is important to capture these products as a separate credit type. As that section explains, a private-label credit card account is a credit card account that can only be used to acquire goods or services provided by one business (for example, a specific merchant, retailer, independent dealer, or manufacturer) or a small group of related businesses. A co-branded or other card that can also be used for purchases at unrelated businesses is not a private-label credit card.

The Bureau believes that covering private label or cobranded credit transactions supports section 1071's statutory purposes. For instance, the Bureau believes that having robust data on this important source of financing will help to better understand small business needs. In researching the consumer credit card market, for example, the Bureau learned that while private label card account holding has declined relative to general purpose cards, late fees comprised the overwhelming majority—91 percent—of all consumer fees and 25 percent of total interest and fees for private label cards (compared to 45 percent and 7 percent, respectively, for general purpose credit cards). Additionally, since private label and cobranded credit accounts are typically offered and serviced by financial institutions, with applications typically submitted directly to the financial institution via a website, the Bureau does not have the same concerns related to data quality or regulatory compliance as it does with trade credit offered by a supplier of goods and services who is not in the business of providing financial services. The Bureau also is not placing a $50,000 minimum threshold on such transactions, as suggested by a few commenters, because doing so would exclude significant portions of small business lending. The Bureau does not believe that such an approach would further the purposes of section 1071.

104(b)(2) HMDA-Reportable Transactions

Proposed Rule

The potential for overlap exists between section 1071 and HMDA because HMDA reporting requirements apply to mortgages regardless of whether they are consumer-purpose or business-purpose, so long as they are secured by residential real property. Section 1071 applies to all small business credit, regardless of what the credit is to be used for. For example, a mortgage intended to finance the purchase of an investment property would be covered by HMDA, assuming relevant institutional thresholds and other coverage criteria were otherwise met. If the mortgage applicant is a natural person, their ethnicity, race, and sex would be captured and reported under HMDA. However, if the mortgage applicant were a non-natural person ( e.g., a limited liability company or a corporation), then the lender would not collect demographic data under HMDA. That is, the lender would still need to report the application under HMDA, but they would report ethnicity, race, and sex as “not applicable.” But under the Bureau's proposed rule, the lender would have captured the applicant's principal owners' ethnicity, race, and sex.

In its NPRM, the Bureau stated that by proposing to adopt Regulation C's definition of dwelling and its commentary regarding investment properties, the Bureau sought to ensure consistency and minimize compliance burdens for financial institutions that must also report credit transactions covered by HMDA (that is, HMDA-reportable transactions). Using the 2019 HMDA data, the Bureau had 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 expected to be reported annually under the proposed rule would have been around 26 million. Thus, the Bureau had anticipated a relatively small but not insignificant overlap regarding real estate investment loans between HMDA and section 1071.

Also in its proposal, the Bureau stated that it had considered excluding all transactions that were also reportable under HMDA but believed such an exclusion would have added complexity to data analysis. The Bureau understood that requiring lenders to find and delete from databases that supply their small business lending data 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 small business lending data submission. For example, if a small business wants to purchase a 5+ dwelling unit property (that is, HMDA reportable), the 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 believed that it may not be possible to identify loans in the HMDA data that, but for this exclusion, would be reported under the Bureau's rule implementing section 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 noted in its proposal its concerns that excluding all transactions that were also reportable under HMDA may be at odds with the statutory purposes of section 1071. The Bureau explained that the following proposed data points would not be collected for applications only reported under HMDA: (1) the principal owner's ethnicity, race, and sex where the applicant is an entity not an individual; (2) minority-owned and women-owned business status; (3) gross annual revenue; and (4) other data points such as pricing, NAICS code, and number of workers.

For applications that, under the proposal, would have been reported under both HMDA and section 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 sought comment on whether it should require such applications to be flagged as such when reported under subpart B. The Bureau noted its belief 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.

Comments Received

The Bureau received comments on this aspect of the proposal from a range of commenters, including lenders, trade associations, community groups, and a business advocacy group. Only one commenter, a community group, expressly supported dual reporting. The Bureau received a general suggestion to connect a loan to a HMDA record and then capture, under HMDA, demographic data on corporate entities, and expand its coverage to include more lenders, such as government entities and CDFIs. Two commenters suggested the Bureau provide a section 1071/HMDA sample form to aid dual reporting compliance. Some industry commenters generally stressed the need for consistency among reporting regimes and asked the Bureau to reconcile any differences.

Numerous comments, echoing those made by a trade association, urged the CFPB to avoid duplicative and inconsistent reporting of HMDA and CRA data in order to reduce compliance burden and the potential for inaccurate data reporting. An agricultural lender suggested the Bureau might be able to obtain 1071 data using the existing definitions and collection process currently in place for covered institutions under HMDA. A few credit union trade associations maintained that reporting of HMDA-reportable transactions should be voluntary. A bank recommended the Bureau remove and avoid data collection requirements that are duplicative and/or inconsistent, providing the example of misaligned action taken categories or alternatively, eliminate all business-purpose loans from the HMDA reporting requirement. A credit union argued that the benefit of dual reporting does not justify the increased burdens.

A few industry commenters stated that if dual reporting is required under the final rule, a dual reporting flag would be useful. Another commenter opposed adoption of a dual reporting flag, arguing that flagging entries will be a manual process that will increase the time it takes to file both reports and increase the possibility of making an error.

Almost all the comments on this aspect of the proposal argued against the proposal to report HMDA-reportable transactions under this rule. Some opponents to dual reporting urged the Bureau to exclude all HMDA-reportable transactions from this rule, while others recommended excluding transactions covered by this rule (such as business purpose loans) from Regulation C. A few other commenters did not express a preference and asked that the Bureau exempt HMDA-reportable applications from section 1071 reporting, or vice versa. Many commenters asserted burden and stated that reported data would be duplicative and/or inconsistent. Several commenters pointed to differences in census tract reporting requirements as a source of potential confusion and data errors. And as discussed in the section-by-section analysis of § 1002.107(a)(19), another urged the Bureau to consider difficulties caused by the differences in collection and reporting of the ethnicity, race, and sex fields and the variations in data specifications for such information.

One bank commenter suggested that avoiding dual reporting may also avoid materially misrepresenting a lender's total loan application activity. A few industry commenters argued that reporting under HMDA alone meets 1071 purposes, with two of these commenters pointing to the Bureau's website, which states that HMDA “data help show whether lenders are serving the housing needs of their communities; they give public officials information that helps them make decisions and policies; and they shed light on lending patterns that could be discriminatory.” Two commenters that argued against dual reporting explained that mortgage lending is fundamentally different from small business lending. Responding to concerns about data gaps, two other commenters suggested that if the Bureau tailored the exception to applications that are reported under HMDA, not applications that could be reported under HMDA, institutions not subject to the HMDA reporting regime would still have to report HMDA-eligible applications under section 1071 because they would not actually report such applications under HMDA. A bank recommended separating HMDA and section 1071 reporting such that only after a transaction was assessed for HMDA-reportability would a financial institution determine whether the transaction needed to be reported under section 1071.

Final Rule

For the reasons set forth herein, the Bureau is adding new § 1002.104(b)(2) to exclude a covered loan as defined by Regulation C, 12 CFR 1003.2(e), pursuant to its authority under ECOA section 704B(g)(2) to adopt exceptions to any requirement of section 1071, as the Bureau deems necessary or appropriate to carry out section 1071's purposes. Under this approach, for all applications with potential HMDA and section 1071 overlap, the Bureau would not require reporting under section 1071 (transactions would only be reportable under HMDA, and the recordkeeping and demographic data collection obligations of HMDA will apply). In 2021, there were 61,789 “business or commercial purpose” applications (excluding purchased loans), reported under HMDA with the “investment” occupancy code, for 5+ unit properties. Of those, 54,436 were from “non-natural person” applicants so demographic data under HMDA was not collected (thus, such data would have been requested for only for 7,353 of the 61,789 applications in 2021). The Bureau recognizes that there would continue to be no demographic data information collected and reported for the ~55,000 HMDA applications with non-natural person owners. The Bureau is finalizing this exclusion of HMDA-reportable transactions in order to alleviate concerns from a broad range of industry commenters about the difficulties associated with dual reporting, particularly in light of potential inconsistences related to demographic data collection and recordkeeping. In addition, this approach resembles the effort by the CRA agencies to eliminate dual reporting under section 1071 and the eventual CRA rule.

While the Bureau agrees that dual reporting of such transactions could be useful, the Bureau is mindful of commenters' concerns regarding burden and that reported data would be somewhat duplicative and/or potentially inconsistent for data points such as census tract, and principal owners' ethnicity, race, and sex. The Bureau believes that excluding all HMDA-reportable transactions would further the purposes of section 1071 because such an exclusion would limit this potential inconsistency that could result in poor data quality. Further, the Bureau is excluding all HMDA-reportable transactions from this final rule because excluding section 1071 transactions from Regulation C of HMDA would require a separate rulemaking and would disrupt ongoing and planning HMDA data collection efforts that have been in place for years.

The Bureau also agrees that reporting under HMDA alone would meet section 1071's purposes. Regulation C, which implements HMDA, provides that its public loan data can be used: (i) to help determine whether financial institutions are serving the housing needs of their communities; (ii) to assist public officials in distributing public-sector investment so as to attract private investment to areas where it is needed; and (iii) to assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes. These purposes are entirely consistent with section 1071's purposes to facilitate 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. As the Bureau has previously stated, it believes that “HMDA's scope is broad enough to cover all dwelling-secured commercial-purpose transactions and that collecting information about all such transactions would serve HMDA's purposes.” The Bureau has also noted that collecting data about dwelling-secured commercial-purpose transactions serves HMDA's purposes by showing not only the availability and condition of multifamily housing units, but also the full extent of leverage on single-family homes, particularly in communities that may rely heavily on dwelling-secured loans to finance small-business expenditures.

The Bureau recognizes its finalized approach will result in some data gaps. Most notably, some section 1071 information will not be collected for applications reported under HMDA, including the principal owner's ethnicity, race, and sex where the applicant is not an individual but an entity ( i.e., not a natural person); minority-owned, women-owned, and LGBTQI+-owned business statuses; gross annual revenue; pricing; NAICS code; and number of workers. Moreover, at this time, the Bureau is not tailoring its exception to applications that are actually reported under HMDA, as opposed to those that could be reported under HMDA. New § 1002.104(b)(2) excludes all transactions meeting the definition of a Regulation C “covered loan,” which means that institutions not subject to the HMDA reporting regime (because, for example, of institutional coverage thresholds) do not have to report HMDA-eligible applications under section 1071 even though they would not actually report such applications under HMDA. Additionally, the Bureau does not believe it would be feasible to connect, as suggested, an application reported under this final rule to a HMDA record and then capture, under HMDA, demographic data on corporate entities, and expand its coverage to include more lenders, such as government entities and CDFIs.

After considering the comments, the Bureau has concluded that trying to close all potential data gaps would defeat the purpose of trying to reduce complexity and alleviate concerns from commenters about having to implement and maintain two separate reporting systems. Given the fact that the Bureau expects around 25 million applications to be reported annually under the final rule, it believes that its exclusion of HMDA-reportable transactions will result in a relatively small loss of data and that these data might have been inconsistent with other 1071 data in ways that could impede analysis, frustrating the purposes of section 1071. The Bureau also notes that even in its proposal, and as discussed below, it did not seek to requiring reporting of all HMDA-reportable transactions under section 1071—only those “business or commercial purpose” applications (excluding purchased loans), reported under HMDA with the “investment” occupancy code, for 5+ unit properties would have also been reported under 1071. As a result, the Bureau notes that for 7,353 of the 61,789 such applications in 2021, there would continue to be no demographic data information collected and reported for only ~55,000 HMDA applications with non-natural person owners. The Bureau believes that this is an acceptable number given how small it is compared to the total number of reported transactions and given the strong concerns expressed about the difficulties with compliant dual reporting that could result in poor data quality and thereby undermine the section 1071 statutory purposes. As for the number of “covered loan” applications that are ultimately not reported under HMDA, the Bureau believes that these applications can be excluded for the same reasons explained below in the section-by-section analysis of § 1002.105(b); financial institutions with the lowest volume of small business lending might limit small business lending activity because of the fixed costs of coming into compliance with the reporting requirements, creating risk of market disruption which would run contrary to the business and community development purpose of section 1071. Additionally, as the Bureau explained in HMDA, the Bureau “sought to exclude financial institutions whose data are of limited value in the HMDA dataset, thus ensuring that the institutional coverage criteria do not impair HMDA's ability to achieve its purposes, while also minimizing the burden for financial institutions.” The Bureau similarly believes that these data would have limited value in the 1071 dataset—the Bureau will be able to fulfill section 1071's purposes without it, while reducing burden and complexity for financial institutions that are not HMDA reporters.

Finally, the Bureau notes that section 1071 will capture business credit transactions that are secured by real estate but are not presently captured under HMDA. For example, section 1071 will capture transactions secured by non-dwellings as well as business loans secured by an applicant's primary residence or residential investment property as collateral for inventory financing or working capital (such loans would not be captured under HMDA because they do not involve a home purchase, home improvement, or refinancing). The small business lending rule will also capture transactions that are secured by dwellings located on real property used primarily for agricultural purposes.

Credit Secured by Certain Investment Properties

Based on feedback received during the SBREFA process 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 individual dwelling units 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, and the Department of Veterans Affairs, and are likely already reported under HMDA.

In line with the SBREFA Panel's recommendation, the Bureau proposed that the 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 have explained 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 did not propose 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 proposed 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). The Bureau proposed 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, was modeled on Regulation C's comment 4(a)(6)–4.

In its proposal, the Bureau noted its belief 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 stated that it 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, which could be contrary to section 1071's business and community development purpose.

The Bureau sought 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-purpose credit. The Bureau also sought 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.

The Bureau received comments on this aspect of the proposal from lenders, trade associations, and a community group. Several commenters supported the exclusion of credit secured by certain investment properties. A community group stated that the exclusion was appropriate because the purpose of such credit is investment and not operating a business of renting out units.

A few comments urged expansion of the proposed exclusion to other real estate secured lending. A joint letter from several trade associations representing the commercial real estate industry advocated for expanding the proposed exclusion to impose a clear boundary between small business lending and all investment property lending to ensure that the information gathered under section 1071 reflects true small business lending. In line with this suggestion, this commenter also recommended rule text revisions. Another trade association suggested expanding the exclusion to all non-owner occupied commercial and multifamily real estate lending, arguing that the credit is underwritten on the cash flow of the property and the value of the property itself, rather than the operating revenue of a business, like other investment properties. Another commenter suggested the Bureau specifically exempt commercial real estate loans secured by non-owner-occupied investment real estate to borrowing entities with NAICS codes 5311XX, the industry code for lessors of real estate.

Some comments reflected requests for clarifications and confusion regarding the proposal. A bank suggested removing occupancy status from covered credit transaction considerations because occupancy does not fairly or materially delineate small business lending from consumer lending and creates complexity in how financial institutions would need to design processes, systems, and training. Community groups suggested the Bureau require financial institutions to ask whether the credit will be used primarily for business purposes, such as to secure rental income. A bank suggested the Bureau focus on borrower type (natural person versus entity) instead of property type. A trade association urged the Bureau to remove the proposed exclusion for credit secured by certain investment properties and replace it with an exclusion of all credit subject to Regulation Z. Another bank commenter sought clarification of the proposed exclusion, noting situations where a borrower or a related party occupies a dwelling unit but still considers it to be an investment property and not a business. A trade association asked the Bureau how to determine owner occupancy for non-dwelling real estate, such as where a business owns an office building with multiple rental office spaces, and rents out all of these spaces except for one space occupied by the business itself. One bank appeared to believe that credit secured by 1–4 dwelling unit investment properties would be reportable for both HMDA and section 1071 with varying reporting requirements.

For the reasons stated herein and in the section above regarding HMDA-reportable transactions, the Bureau is adding new § 1002.104(b)(2) to exclude a covered loan as defined by Regulation C, 12 CFR 1003.2(e). This new exclusion renders moot the Bureau's consideration of proposed comment 104(b)–4 by encompassing virtually all 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's decision also renders moot comments regarding requests for clarifications and confusion regarding the proposal.

A “covered loan” as defined by Regulation C, 12 CFR 1003.2(e), means a closed-end mortgage loan or an open-end line of credit that is not an excluded transaction under § 1003.3(c). A transaction is not a “covered loan” if it is excluded by purpose. For example, Regulation C excludes agricultural-purpose transactions and transactions that are secured by a dwelling, as defined by § 1003.2(f), that is located on real property that is used primarily for agricultural purposes. The regulation also excludes transactions otherwise made primarily for a business or commercial purpose unless the transaction is also: a home improvement loan; a home purchase loan; or a refinancing (including cash-out refinancing). Transactions are only covered under HMDA as covered loans if they are secured by a lien on dwelling. In addition to principal residences, a dwelling includes, but is not limited to, manufactured homes, multifamily apartment buildings, and properties for long-term housing and related services (such as assisted living for senior citizens or supportive housing for people with disabilities). Thus, a transaction may need to be reported under section 1071 if it is secured by a lien on a non-dwelling; for example, a recreational vehicle, houseboat, a hotel, dormitory, or properties for long-term housing and medical care if the primary use is not residential. For a full list of exclusions, please refer to Regulation C, section 1003.3. The Bureau notes that even if a transaction is excluded under Regulation C, that does not mean it is necessarily reportable under section 1071. For example, even though a transaction is a not a HMDA “covered loan” if it is a purchase of a partial interest in an otherwise covered loan, and thus not excluded by new § 1002.104(b)(2), it is also not reportable under this rule because, as explained below in the section regarding certain purchases of covered transactions, only the definition of “covered application” will trigger data collection and reporting obligations with respect to covered credit transactions and such purchases do not involve an application for credit.

While the Bureau anticipates that adoption of new § 1002.104(b)(2) results in the exclusion of most dwelling-secured lending, this Bureau is not expanding this exclusion to all investment (non-owner occupied) property lending, as recommended by a few commenters. Where a small business seeks credit to invest in commercial (non-dwelling) real estate, it is likely to apply to a financial institution's commercial lending division and there are unlikely to be any difficulties in determining that the transaction is a business-purpose real estate investment (and not a consumer-purpose real estate investment). It is important for this rule to capture lending to true small businesses (as opposed to consumers seeking to diversify their investments) to meet section 1071's business and community development purpose. Moreover, because such lending is not covered by HMDA, the potential for poor data quality arising from inconsistent dual reporting does not occur in this situation. In other words, excluding such transactions from coverage would not advance section 1071's statutory purposes in the same way as does excluding HMDA-reportable transactions. Rather, covering these transactions will allow data users for the first time to better understand the rationale behind credit decisions, help identify potential fair lending concerns, and provide financial institutions with data to evaluate their business underwriting criteria and address potential gaps for commercial real estate lending and cash flow financing. In addition, robust data on such credit transactions across applicants, financial institutions, products, and communities could help target limited resources and assistance to applicants and communities, thus furthering section 1071's business and community development purpose. With respect to fair lending compliance, such data would help data users analyze potential discriminatory disparities.

104(b)(3) Insurance Premium Financing

To better manage cash flow and help pay for costly property and casualty insurance premiums, many businesses enter into insurance premium financing arrangements. Under a typical arrangement, an insurance premium financing company provides funds to pay for premiums that are remitted directly to the business's insurance provider, either directly or through an insurance agent or broker. The business then repays the premium amount advanced, plus some additional amount in the form of interest or a service charge, which is sometimes capped by State law. If the business fails to repay the loan or otherwise defaults in its obligation, or if the insurance contract is cancelled, the insurance premium financing company is empowered under the financing agreement to demand the unearned premiums directly from the insurer. The Bureau understands that insurance premium financing companies have little to no contact with the businesses seeking credit and insurance premium financing arrangements are typically underwritten based on the terms of the insurance policy, the financial strength of the insurer that issued the policy and holds the unearned premium, and the uncollateralized exposure of the financing company, if any.

Unlike with other forms of credit, borrowers in insurance premium financing transactions are not free to use advanced amounts for general purchases because those amounts are intended solely to cover the cost of property and casualty insurance premiums and the funds are often remitted directly to the business's insurer. Moreover, because insurance premium financing companies are contractually empowered in the event of default to cancel the insured's insurance coverage and obtain a refund of unearned premiums to repay the amount advanced, these transactions are not typically underwritten based on the insured's ability to repay but on the value of the unearned premium collateral and the financial strength of the insurance carrier holding that collateral. The Bureau also understands that, in some cases, certain contractual terms, including maximum interest rates, are regulated by State law.

In the NPRM, the Bureau stated its belief that an organization offering insurance premium financing, where the organization provides short-term loans to businesses to pay for property and casualty insurance, would have been included within the definition of a financial institution in proposed § 1002.105(a), even though this specific business model was not described in proposed comment 105(a)–1. The Bureau did not specifically discuss insurance premium financing in its section-by-section analysis of proposed § 1002.104, noting that the Bureau was proposing to require that covered financial institutions report data for all applications for transactions that meet the definition of business credit unless otherwise excluded.

A group of insurance premium financing trade associations urged the Bureau to exclude insurance premium financing from the rule. This comment did not dispute that such financing is credit but argued that it should not be covered because it is unlike any other form of small business credit—insurance premium finance lenders do not interact with or exchange information with the applicant, credit terms (including interest rate and fees) are preestablished and do not vary, and some State insurance codes provide requirements regarding interest rates, fees, disclosures, and other aspects of a premium finance transaction. This commenter also maintained that insurance premium financing presents minimal fair lending risk, most of the data proposed to be required is not currently collected and would not be useful for comparisons, and financing companies would incur significant costs to comply, potentially limiting access to this credit. The commenter noted that FinCEN exempted insurance premium financing companies from its final rule imposing customer due diligence (beneficial ownership) obligations under the Bank Secrecy Act. This trade association stated that, if the Bureau does not exclude insurance premium financing companies, the Bureau should clarify how the rule will apply to avoid curtailment of credit and conflict with State insurance laws, particularly those that prohibit, or at a minimum discourage, insurance agents and brokers from collecting applicant-provided demographic data from insureds.

The Bureau also received a letter from several members of Congress citing potential conflicts between proposed section 1071 requirements and State regulatory frameworks that they believed would improperly impair or interfere with State insurance law. They requested the Bureau reconsider subjecting these products to the final rule because they believed that doing so would not advance the policy underpinning section 1071 and would further negatively impact small businesses and their ability to purchase adequate insurance coverage.

For the reasons set forth herein, the Bureau is excluding insurance premium financing transactions from the final rule. New § 1002.104(b)(3) defines insurance premium financing as a financing arrangement wherein a business agrees to pay to a financial institution, in installments, the principal amount advanced by the financial institution to an insurer or insurance producer in payment of premium on the business's insurance contract or contracts, plus charges, and as security for repayment, the business assigns to the financial institution certain rights, obligations, and/or considerations (such as the unearned premiums, accrued dividends, or loss payments) in its insurance contract or contracts. New § 1002.104(b)(3) adds that this exclusion does not include the financing of insurance policy premiums obtained in connection with the financing of goods and services.

The Bureau is adopting a definition of “covered credit transaction” that excludes insurance premium financing 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, as well as its authority under 704B(g)(2) 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 statute's requirements, as the Bureau deems necessary or appropriate to carry out the purposes of section 1071. While insurance premium financing constitutes “credit” within the meaning of § 1002.102(i) and may constitute “business credit” within the meaning of § 1002.102(d) (depending on its purpose), the Bureau believes that it is categorically different from products like loans, lines of credit, credit cards, and merchant cash advances and that there are several reasons to believe that excluding it from coverage advances section 1071's statutory purposes. Insurance premium financing is not a general-use lending product, but instead, like trade credit, exists only to facilitate the sale of a specific nonfinancial product or service. Providers of insurance premium financing are not primarily financial services providers, nor do they currently manage compliance with regulatory requirements associated with making extensions of credit. Taken together, requiring insurance premium financing to be reported under subpart B may lead to significant data quality issues. In addition, the fixed costs of coming into compliance with this final rule could lead insurance premium financing companies to limit offering this credit to their small business customers, potentially undermining the business and community development purpose of section 1071.

The Bureau believes the new exclusion in final § 1002.104(b)(3) will carve out narrow financing arrangements where the amount financed is reasonably related to and intended to directly pay the cost of a business's insurance policy premiums. New § 1002.104(b)(3) also limits the exclusion to situations where the business assigns the financial institution certain rights, obligations, and/or considerations (such as the unearned premiums) in its insurance policy because the Bureau understands that such security interests ensure that the underwriting focus is on the insurer, and not the small business applicant. New § 1002.104(b)(3) clarifies that the exclusion does not include the financing of insurance contract premiums purchased in connection with the financing of goods and services.

The Bureau notes that final § 1002.104(b)(3) does not cover situations where the insurance provider itself provides a business the right to defer payment of an insurance premium or fee owed by the business beyond the monthly period in which the premium or fee is due. However, such arrangements may be covered by the trade credit exclusion in final § 1002.104(b)(1).

Factoring

Background

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 the factoring market is generally dominated by nondepository institutions 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.

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. 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. In the 2020 Small Business Credit Survey of Employer Firms, this figure dropped to 3 percent of employer firms and in the 2021 survey, this figure went back up to 4 percent.

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,” Regulation B's notification rules apply, as do other relevant sections of ECOA and Regulation B. 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, 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).”

Proposed Rule

In the NPRM, the Bureau proposed to not cover factoring. Modeled on the definitions set forth in the New York and California commercial financing disclosure laws, proposed comment 104(b)–1 would have provided 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 have also clarified 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 sought comment on its proposed approach to factoring. The Bureau also sought 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 rule. Specifically, the Bureau sought comment on whether such arrangements should be reported as credit extensions incident to factoring (and thus reported as “other sales-based financing”) or as merchant cash advances.

Comments Received

The Bureau received comments on this aspect of the proposal from a range of commenters, including lenders, trade associations, and community groups. One commenter urged the Bureau to include the distinctions between merchant cash advances and factoring that were discussed in its NPRM preamble in the final rule's text or commentary to avoid future confusion over what products are ultimately covered by the final rule. This commenter also asked the Bureau to address the role of recourse and underwriting in its analysis of whether a particular financing transaction qualifies as credit. Another commenter encouraged the Bureau to consider differences between various factoring product structures and offered some explanations on how the term and costs of factoring arrangements could be reported. A community group asked the Bureau to explicitly include credit extensions incident to factoring arrangements in the list of covered transactions in the final rule, along with loans, lines of credit, credit cards, and merchant cash advances.

A wide range of commenters, including many community groups, community-oriented lenders, several members of Congress, individuals, and a nonbank online lender, urged the Bureau to cover factoring in the final rule. One community group suggested the Bureau use its discretionary authority to define credit broadly, regardless of comment 9(a)(3)–3 in Regulation B or other ECOA provisions, to avoid a conflict with congressional intent of shedding light on the distribution of financing to minority-owned, women-owned, and small businesses. Several commenters shared concerns about insufficient data on factoring and stressed the need for more transparency and for having a complete picture of the small business financing market. A few commenters argued that factoring constitutes a large part of the small business financing landscape and that section 1071's purposes would not be fulfilled without covering this product. Several commenters pointed to the fact that factoring arrangements are often used by minority-owned small businesses as evidence that they should be covered by the rule, with a few commenters specifically raising fair lending concerns related to factoring.

A few commenters questioned factoring's exclusion as non-credit, with the cross-sector group arguing that its inclusion would not create compliance concerns for other provisions of Regulation B because section 1071 is not broadly applicable to the entirety of Regulation B. That commenter also argued that a factoring arrangement is “credit” whenever its recipient is held liable for deferred payments conditional on the third party's ability to repay. This commenter noted that while recourse agreements (cited by the commenter as constituting 88 percent of the industry) enable the factor to pursue payment from the recipient if the third party fails to repay, non-recourse agreements also enable factors to seek payments from recipients under a variety of circumstances. Another community group argued a factoring arrangement is credit when a small business receives an amount less than the amount due from its client because the small business recipient in that case is effectively paying interest and/or fees. A joint letter from community groups suggested the Bureau make clear that factoring is excluded only where there is a bona fide sale of an accrued right to payment without creating any obligations—contingent or otherwise—on the seller.

Two commenters pointed to the fact that New York and California both include factoring in their respective commercial financing disclosure laws as a reason why it should be covered by the rule. Some commenters expressed strong concerns that the exclusion of factoring would open a door to potential evasion by merchant cash advance providers and other actors. Many commenters urged the Bureau to include factoring within its rule implementing section 1071 in order to monitor these arrangements and prevent abuses.

Two commenters, both providers of factoring, suggested the Bureau clarify that non-recourse factoring is covered by the trade credit exclusion. These commenters noted that non-recourse factors would be subject to the rule as proposed because it would have provided that the extension of business credit by a financial institution (such as a factor) other than a supplier for the financing of the sale of inventory is not “trade credit.” These commenters argued that compliance would be burdensome and disruptive to their operations, with one commenter stressing how important non-recourse factoring is in facilitating the sale of product by sellers to buyers.

Final Rule

For the reasons set forth herein, the Bureau is finalizing comment 104(b)–1 largely as proposed and is not covering factoring under the rule. The Bureau believes that, as discussed with respect to merchant cash advances above, a factoring agreement, as described in 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 on a legally enforceable claim for payment for goods that the recipient has supplied or services that the recipient has rendered but for which payment in full has not yet been made. The Bureau also believes that treating factoring as credit under the 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.

The Bureau is finalizing a detailed description of what constitutes factoring in comment 104(b)–1 because 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 define “accounts receivable.” This finalized description, modeled on the definitions set forth in the New York and California commercial financing disclosure laws, provides 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 in full has not yet been made. The Bureau has added the words “in full” to the proposed description to account for the fact that factoring may include an immediate partial payment or down payment to the businesses supplying the goods or services. Comment 104(b)–1 states 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.

Based on the Bureau's work to date, comments received, 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. Comment 104(b)–1 thus clarifies 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 § 1002.107(a)(5). By contrast, arrangements that do not involve goods or services that have already been supplied or rendered are not “factoring” under the Bureau's description. The Bureau makes clear in comment 104(b)–1 that, despite the fact that some providers may label such arrangements as factoring, the name used by the financial institution for a product is not determinative of whether or not it is a “covered credit transaction,” and such arrangements are not factoring as described in the final rule and are covered.

The Bureau does not believe it would be appropriate to codify distinctions between merchant cash advances and factoring in the final rule's text or commentary, as suggested by a commenter. The Bureau believes that factoring involves the sale of existing and alienable assets, while merchant cash advances involve a promise of future payments derived from anticipated receivables. Accordingly, providers of merchant cash advances—but not factoring that involves the sale of existing and alienable assets—grant the right to incur debt and defer its payment at a later date within the meaning of “credit” under § 1002.102(i).

For that reason, to the extent that a purported factoring arrangement involves multiple revolving transactions such that the transaction between the recipient and the provider of funds is not complete at the time of the sale, that transaction constitutes credit, and the Bureau would expect such a transaction to be reported as an “Other sales-based financing transaction” because it constitutes an extension of business credit that may or may not be incident to a factoring arrangement (depending on whether the first transaction involved the sale of existing and alienable assets). In terms of how to report the term and costs of extensions of credit incident to factoring arrangements, the Bureau notes that final § 1002.107(a)(12)(v) would require financial institutions to report, for a merchant cash advance or other sales-based financing transactions, the difference between the amount advanced and the amount to be repaid and that final § 1002.107(a)(5)(iii) requires reporting of estimated loan term for merchant cash advances and other sales-based financing in certain circumstances.

As noted above, the products discussed in this preamble do not constitute an exhaustive list of covered credit transactions; other types of business credit not specifically described nevertheless constitute covered credit transactions unless excluded by final § 1002.104(b). In line with this approach, the Bureau is not expressly delineating additional products (such as credit extensions incident to factoring arrangements) as covered credit transactions in the final rule's regulatory text or commentary. Nor is it reopening existing Regulation B at this time in order to interpret “credit” to include factoring. The Bureau acknowledges that factoring constitutes a large part of the small business financing landscape, particularly among minority-owned small businesses, and that it would be helpful to have more transparency into these arrangements. However, making such a change as part of this final rule could creating inconsistences and compliance challenges with respect to existing Regulation B provisions.

The Bureau also does not believe that the question of whether a factoring arrangement is credit should be determined based on whether the small business recipient is effectively paying finance charges. For the reasons discussed in the section-by-section analysis of § 1002.102(i), the Bureau is finalizing a definition of “credit” that largely follows the definition of credit in ECOA and existing § 1002.2(j); meaning 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. This longstanding definition does not turn on “the number of installments required for repayment, or whether the transaction is subject to a finance charge,” nor on how underwriting is conducted. Rather, in order for factoring to be credit under ECOA, a factor must grant the right to defer payment of debt or to incur debts and defer its payment.

The Bureau also does not believe it would be appropriate, at this time, to distinguish between recourse and non-recourse factoring that involves the business-to-business sale of existing and alienable assets. The Bureau is aware that a significant proportion of the factoring market, as it is currently understood, may consist of recourse factoring, in which factors may pursue repayment from the recipient of funds if the third party fails to pay, and that even non-recourse agreements may enable factors to seek repayment from recipients under some circumstances, such as fraud. As a result, the Bureau understands that in much of what market participants understand to be “factoring” within the meaning of existing Regulation B, the transaction between the recipient and the provider of funds is not conclusively complete at the time of the sale. The Bureau agrees with commenters that these transactions are, at minimum, akin to credit. Nevertheless, the Bureau believes that requiring reporting for these transactions at this time would have the effect of upending market participants' settled expectations that “factoring” is not credit within the meaning of existing Regulation B. Therefore, data collection and reporting pursuant to subpart B is not required for 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, regardless of whether the agreement includes recourse or other nonpayment contingency provisions.

The Bureau appreciates the fact that New York and California both include factoring in their respective commercial financing disclosure laws and has in fact drawn from the States' helpful regulatory language for its own section 1071 commentary. However, coverage of factoring by these or other States in their commercial financing disclosure regimes does not affect what constitutes “credit” under ECOA. The Bureau understands concerns that exclusion of factoring may open a door to potential evasion by merchant cash advance providers and other actors. However, the Bureau does not agree that it must include factoring in this final rule in order to monitor these arrangements and prevent abuses.

In the course of considering financial institutions' compliance with the rule, the Bureau intends to closely scrutinize secured finance transactions to ensure that companies are appropriately categorizing and reporting products as required by section 1071. The Bureau also intends to obtain more information about the use of recourse and other nonpayment provisions in the factoring market, including types of these provisions and the frequency with which factors invoke them. If it proves necessary to modify existing Regulation B or subpart B, the Bureau is prepared to exercise all of its available authorities, including its authority under section 703 of ECOA to make adjustments that are necessary to prevent circumvention or evasion.

With respect to comments asking the Bureau to clarify that non-recourse factoring is covered by the trade credit exclusion, the Bureau notes that while non-recourse factors may not be subject to the trade credit exclusion because they are not typically a supplier that finances the sale of equipment, supplies, or inventory, they are likely providing “factoring” as described in final comment 104(b)–1. For the reasons discussed in the section-by-section analysis of § 1002.104(b)(1), the Bureau is not expanding its exclusion of trade credit to include third-party financing companies.

Leases

Background

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. 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. Until the issuance of the NPRM, the Bureau had 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, which concluded that consumer leasing falls under ECOA. 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.” The Board then noted that it will continue to monitor leasing transactions and take further action as appropriate. 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 Uniform Commercial Code (UCC), which closely resemble (and according to some stakeholders, in some cases are indistinguishable from) term loans. The Bureau understands that financial leases 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 low 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.

Proposed Rule

In the NPRM, the Bureau proposed to not cover leases. Drawing from the UCC definition of “lease,” which was incorporated into the New York and California commercial financing disclosure laws, proposed comment 104(b)–2 would have provided 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 have further stated 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 sought 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 section 1071. Based on the practical difficulty cited by some stakeholders of distinguishing leases from loans, the Bureau also sought comment on whether financial institutions should be permitted to voluntarily report lease transactions.

Comments Received

The Bureau received comments on this aspect of the proposal from several community groups and community oriented lenders, trade associations, an online lender, and several members of Congress. Many of these comments argued that leases should be covered under the Bureau's rule. A few commenters suggested that leases were much like loans and other credit, with one commenter asserting that where a small business may retain leased equipment, that is akin to lending in which debt is incurred, payment is deferred and payments are made over a significant time period for a substantial asset, that is, the equipment. This commenter noted that the Bureau could apply its proposed loan threshold to leases. A cross-sector group of lenders, community groups, and small business advocates maintained that any data collection on the leasing market would be valuable, even if limited to credit sale leases or “$1 leases” (where the lessee makes payments on the leased item and at the end of the lease term, purchases the item for $1), which the commenter viewed as a form of credit sale lease.

A few commenters urged the Bureau to cover this large and growing share of the small business financing market in order to avoid data gaps. Two commenters expressed fair lending and predatory practice concerns regarding leasing—one commenter pointed to a lawsuit filed by the California State Attorney General against two lease financing companies operating in 15 states that allegedly forced 193 Black churches to make lease payments on falsely advertised and faulty computer kiosks. Another commenter noted that leases are often used by minority-owned businesses, in some cases more often than white-owned businesses. This commenter also noted that New York and California both include leasing in their respective commercial financing disclosure laws and that at the Federal level, bicameral commercial financing disclosure legislation has been introduced to cover leasing. Two commenters argued that not covering leases in the final rule would open the door to potential evasion, allowing merchant cash advance providers and other financing companies to structure transactions as leases instead of loans.

Several trade associations, including ones representing equipment and vehicle lease and finance companies, expressed support for the Bureau's proposed approach to not cover leases. One commenter commended the Bureau for recognizing that leases are not treated as credit in the U.S. regulatory structure and for proposing use of the widely accepted UCC definition of a lease. Another commenter observed that the Bureau's proposed definition of “lease” would not cover instances where a lessee purchased or eventually owned the product being leased. This commenter advised against covering leases in the rule, arguing that doing so would result in incorrect reporting when applicants' employees submit lease applications but do not know the full scope of their employer's ownership makeup or financial holdings; it would also increase compliance costs, making short-term leases and rentals significantly more expensive.

Final Rule

For the reasons set forth herein, the Bureau is finalizing comment 104(b)–2 largely as proposed and is not covering leases under the final rule. Drawing from the UCC definition of “lease,” which was incorporated into the New York and California commercial financing disclosure laws, comment 104(b)–2 provides that the term covered credit transaction does not cover leases, and that a lease, for purposes of 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 further states 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. In addition, comment 104(b)–2 clarifies that the name used by the financial institution for a product is not determinative of whether or not it is a “covered credit transaction.”

The Bureau considered several other approaches to covering leasing, including referring to Regulation Z's definition of “credit sale.” Under that definition, a “credit sale” is “a sale in which the seller is a creditor,” and it includes a lease—unless the consumer may terminate it at any time without penalty—where the consumer “[a]grees to pay as compensation for use a sum substantially equivalent to, or in excess of, the total value of the property and service involved” and “[w]ill 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.” 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. 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” and “finance lease,” and/or the generally accepted accounting principles (GAAP) rules issued by the Financial Accounting Standards Board governing “operating,” “capital,” and “finance” leases. 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, 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 business-purpose leases and its expertise with respect to the meaning of “credit,” the Bureau believes that the term “credit” does not encompass such business 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 does not parse whether different types of leases might constitute “credit” but notes that final comment 104(b)–2's definition of 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. For further clarification, the Bureau notes that UCC section 1–203 provides helpful guidance on how to distinguish a lease from a security interest. For example, UCC section 1–203 provides, in part, that a lease transaction creates a security interest if the lessee's payment obligation continues for the term of the lease and is not subject to termination by the lessee and the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement. The UCC additionally provides that additional consideration is nominal if it is less than the lessee's reasonably predictable cost of performing under the lease agreement if the option is not exercised. The UCC appropriately notes that whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case. The Bureau believes that drawing from an established definition of “lease” that small business lenders already use will minimize compliance risks and will offer sufficient consistency and clarity regarding interpretation of final comment 104(b)–2.

The Bureau is not covering leases under this final rule, as requested by some commenters. The Bureau agrees that some business leases are structured like loans and other credit but notes that a commenter's example of a small business being able to retain leased equipment is an example of the creation of a security interest, not a lease under final comment 104(b)–2. Similarly, so-called “$1 leases” create security interests because the lessee has an option to become the owner of the goods for nominal additional consideration. As noted by one commenter, final comment 104(b)–2's definition of lease does not include a transaction resulting in the retention or creation of a security interest.

The Bureau understands that bicameral commercial financing disclosure legislation was introduced in the last Congress to cover some leasing and other commercial finance products under the Federal Truth in Lending Act and that New York and California both include leases in their respective commercial financing disclosure laws. (The Bureau has in fact drawn from the states' helpful regulatory language for its own section 1071 commentary.) However, the Bureau does not believe that the coverage of leases in these particular legislative efforts has any bearing on what constitutes “credit” under ECOA. The Bureau appreciates commenters' concerns that not covering leases could open a door to potential evasion and lead to data gaps or fair lending problems. The Bureau believes that it can observe the small business financing market for such abuses and prevent them without including all leases in the rule. For example, in considering financial institutions' compliance with the rule, the Bureau intends to closely scrutinize transactions to ensure that companies are appropriately categorizing and reporting products as required by section 1071.

Consumer-Designated Credit

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.

The proposed rule would not have covered products designated by the creditor as consumer-purpose products (consumer-designated credit). Proposed comment 104(b)–3 would have made 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 have provided that a transaction qualifies as consumer-designated credit if the financial institution offers or extends the credit primarily for personal, family, or household purposes. The Bureau sought comment on this proposed interpretation, including how the Bureau has defined the scope of consumer-designated credit. The Bureau also sought 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.

The Bureau received comments on this aspect of the proposal from a range of banks, credit unions, trade associations, and community groups. One trade association generally agreed with the Bureau's approach to consumer-designated credit but asked the Bureau to clarify whether retail installment sales contracts are covered by the exclusion of consumer-designated credit. This commenter also asked the Bureau to confirm that, in determining whether credit is excluded as consumer-designated credit, existing comment 2(g)–1 interpreting the definition of “business credit” applies, which provides that “[a] creditor may rely on an applicant's statement of the purpose for the credit requested.”

Some industry commenters supported the Bureau's proposed exclusion of consumer-designated credit. One of these commenters argued that the inclusion of consumer-designated credit within the rule would dramatically expand the size of the data collected beyond the purpose of section 1071, circumventing the congressional intent and increasing the rule's impact on the availability of credit for all consumers— not just business borrowers. Another commenter asked the Bureau to clarify that it will not challenge the designation of a transaction as consumer-designated credit, expressing concerns because financial institutions have no reliable method for validating a latent business purpose in an application for a consumer-designated credit transaction. Two banks recommended against requiring financial institutions to second guess consumers' intentions regarding use of funds by requiring them to report on loans suspected to be used for business purposes.

Several commenters urged the Bureau to cover consumer credit that will be used for business purposes. One community group suggested collecting 1071 data where personal credit card applicants responded that 50 percent or more of the loan would be used for small business purposes, asserting that this threshold would sufficiently weed out applications that would result in nominal amounts of funding for small business purposes but would still capture ones that are potentially important for meeting the community development purpose of section 1071. Two commenters expressed concerns that not covering consumer-designated credit would result in a push toward unregulated products, with one commenter asserting that a portion of the fintech sector is engaging in unscrupulous targeting of vulnerable customers (including racial and ethnic minorities). Two community groups asked the Bureau to reconsider its proposal, emphasizing how important consumer-designated credit is as a source of financing for small businesses, particularly for women-owned and minority-owned small businesses, sole proprietorships, and new businesses. Another community group recommended that the Bureau additionally include personal credit card loans that finance business expenses, asserting that these cards are a vital source of credit for very small and start-up businesses, as well as businesses owned by women and people of color.

A number of banks suggested the Bureau exclude all credit subject to Regulation Z. Some suggested that such an exemption would provide clarity to the definition of “covered credit transaction” and would ease compliance burden when identifying covered applications, implementing data collection, and ensuring data integrity in a manner that meets the statutory purpose. One trade association added that financial institutions are already familiar with determining loan purpose under the Regulation Z definition in their everyday lending activities and that this approach would alleviate confusion with the proposed exclusion for credit secured by certain investment properties.

For the reasons set forth herein, the Bureau is finalizing comment 104(b)–3 almost entirely as proposed and is not covering consumer-designated credit under the final rule. Comment 104(b)–3 makes clear that the term covered credit transaction does not include consumer-designated credit used for business or agricultural purposes, because such transactions are not business credit. The Bureau is adding the reference to agricultural purposes for clarity. Comment 104(b)–3 provides 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 subpart B unless the financial institution designated or intended for the primary purpose of the account to be business-related.

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, financial institutions may not be able to consistently identify when consumer-designated credit is being used for business or agricultural 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 that excluding 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 that is used for business or agricultural purposes within the scope of this rulemaking makes it clear that the applications reported will all be seeking credit to use for business/agricultural purposes, which supports section 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 that is used for business or agricultural purposes provides certainty to financial institutions that offer only consumer-designated credit that they are not subject to this final rule's data collection and reporting requirements.

With respect to the request to clarify whether retail installment sales contracts are covered by the exclusion of consumer-designated credit, the Bureau notes that this exclusion applies equally to all credit products. In other words, a retail installment sales contract qualifies as consumer-designated credit if the financial institution offers or extends it primarily for personal, family, or household purposes. The Bureau confirms, as requested, that because the Bureau is finalizing § 1002.102(d) to define business credit as having the same meaning as in existing § 1002.2(g), existing comment 2(g)–1 also applies to subpart B. Thus, in determining whether credit is excluded as consumer-designated credit, a financial institution “may rely on an applicant's statement of the purpose for the credit requested.”

The Bureau agrees with commenter concerns that the inclusion of consumer-designated credit within the rule would dramatically expand the size of the data collected beyond the purpose of section 1071, circumventing congressional intent and potentially increasing the rule's impact on the availability of credit for all consumers—not just small business borrowers. The Bureau also confirms that financial institutions may rely on an applicant's statement of purpose for the credit requested and need not report consumer-purpose loans suspected to be used for business purposes, recognizing that alternative approaches would likely result in inconsistent results across lenders as they tried to discern latent business purposes in an application for a consumer-designated credit transaction.

With respect to the suggestion that the Bureau require financial institutions to inquire on an application whether 50 percent or more of the borrowed funds would be used for small business purposes and require collection of 1071 data in those instances, the Bureau believes that this approach would raise many of the policy concerns discussed above. The Bureau appreciates the concerns about potential fair lending violations and evasion raised by commenters relating to consumer-designated credit. The Bureau believes that its finalized bright-line approach will better enable it to ensure that financial institutions that are offering business credit are complying with the final rule.

The Bureau is not excluding to exclude all credit subject to Regulation Z from this rule's definition of “business credit,” as suggested by some commenters. The final rule does not cover consumer-designated credit, which includes Regulation Z credit as well as other consumer-designated credit that is not encompassed by Regulation Z. The Bureau notes that some of Regulation Z's provisions apply to business purpose credit cards and that Regulation Z does not cover consumer credit over certain applicable threshold amounts.

Certain Purchases of Covered Credit Transactions, Including Pooled Loans and Partial Interests Proposed Rule

As discussed in the section-by-section analysis of § 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” triggers data collection and reporting obligations with respect to covered credit transactions. In the NPRM, the Bureau noted that under proposed subpart B, purchasing a loan, purchasing an interest in a pool of loans, or purchasing a partial interest in a loan does not, in itself, generate an obligation for a covered financial institution to report small business lending data. Rather, a reporting obligation arises on the basis of receiving a covered application for credit. (See the section-by-section analysis of § 1002.109(a)(3) for additional information.) The Bureau also noted the corollary point that selling an originated covered credit transaction 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.

In addition, the Bureau believed 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 believed that a pooled loan purchase would arise after credit decisions on the relevant loans had already been made ( e.g., after the loans were originated) and therefore the Bureau believed that the purchaser of an interest in a pool of loans would understand that there would be no section 1071 obligation. Information about the loans in this pool would already be captured, as the application for each originated loan in the pool would already be reported (assuming it was originated by a covered financial institution and otherwise satisfies the requirements of subpart B). For clarity, however, the Bureau stated in the NPRM preamble 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 believed that this clarification, similar to Regulation C comment 3(c)(4)–1, would assist covered financial institutions in understanding the scope of their obligations.

Moreover, the Bureau stated that the purchase of a partial interest in a loan does not, in itself, generate an obligation for a covered financial institution to report small business lending data. The Bureau believed that this approach, combined with proposed § 1002.109(a)(3), provided sufficient clarity for financial institutions that choose to take part in loan participations. For example, Financial Institution A receives an application from a small business for a covered credit transaction and approves the loan, and then Financial Institution A organizes a loan participation agreement where Financial Institutions B and C agree to purchase a partial interest. This is a reportable application for a covered credit transaction for Financial Institution A, but it is not a reportable application for Financial Institutions B and C. The Bureau noted 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 for any (or all) of the financial institutions that were CRA reporters, the loans could be reported under the CRA.

The Bureau believed that the statutory purposes of section 1071 encourage the broad collection of small business lending data by financial institutions. The Bureau was not aware of any reason why data with respect to covered credit transactions should not be collected because more than one financial institution holds an interest in the originated loan. Conversely, the Bureau did 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 because having a single loan reported by multiple financial institutions could compromise the quality of the 1071 dataset. Read in conjunction with proposed § 1002.109(a)(3), however, the Bureau believed that the covered credit transactions at issue here would nonetheless generally be reported by one financial institution provided it met the threshold for originated loans pursuant to § 1002.105(b)— i.e., the financial institution that sold portions of the loan to other participants.

The Bureau did not expressly exclude loan purchases, the purchase of an interest in a pool of covered credit transactions or the purchase of a partial interest in a covered credit transaction in the proposed rule's regulatory text or commentary, but sought comment on this approach. With respect to partial interests specifically, the Bureau solicited comment on how such an 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.

Comments Received

The Bureau received several comments regarding loan purchases and loan participations. Commenters did not address pooled loans specifically. A trade association and two banks agreed that loan purchases should not be covered; one of these banks requested that the Bureau add commentary emphasizing this point.

In contrast, two other commenters argued that all loan purchases should be reported, citing consistency with treatment under CRA and HMDA. One commenter further stated that excluding loan purchases and participations from reporting requirements would ignore the role of financial institutions with a significant percentage of loan purchases, despite their importance in the small business lending market. The other commenter stated that 1071 data should replace CRA lending data, the CRA considers loan purchases, and thus so should the Bureau's rule for consistency.

Several farm credit lenders and a trade association said that participation interests and participation loans should be specifically excluded, noting that a participation interest is legally distinct from a loan, the purchaser of an interest is not considered a creditor, and there is risk of double counting the data. One commenter asked that the Bureau exclude loan participations from the definition of “covered credit transaction” because a customer never applies for any lender to participate in a covered credit transaction. In addition, some farm credit lenders noted that they frequently enter into loan participation agreements. They stated that a loan participation is significantly different from the purchase of a loan because under these agreements, the borrower's contractual relationship remains solely with the lead lender. These commenters further stated that requiring a participant to report would be akin to requiring a trust in a mortgage securitization to report HMDA data.

Final Rule

For the reasons set forth herein, the Bureau is revising the commentary to § 1002.104(b) to make clear that loan purchases, the purchase of an interest in a pool of loans, and the purchase of a partial interest in a credit transaction are not “covered credit transactions.” Specifically, the Bureau is adding comment 104(b)–4 to clarify that for purposes of subpart B, the term “covered credit transaction” does not include the purchase of an originated credit transaction, the purchase of an interest in a pool of credit transactions, or the purchase of a partial interest in a credit transaction such as through a loan participation agreement. Such purchases do not, in themselves, constitute applications for business credit that the purchasing entity makes decisions on. Relatedly, in order to illustrate reporting obligations regarding pooled loans and partial interests, the Bureau is also adding examples to the commentary to § 1002.109(a)(3). The section-by-section analysis of § 1002.109(a)(3) addresses in detail situations where multiple financial institutions are involved in a covered credit transaction.

While the Bureau acknowledges the important role of loan purchases in the small business lending market, the Bureau notes that the definition of “covered application” triggers data collection and reporting obligations with respect to covered credit transactions. Under the final rule, purchasing an originated loan, purchasing an interest in a pool of loans, or purchasing a partial interest in a loan does not, in itself, generate an obligation for a covered financial institution to report small business lending data regarding the application underlying the purchased loan. The Bureau has made clear in final § 1002.109(a)(3) and associated commentary that only the action taken on the application is reportable.

In response to commenters who urged consistency with HMDA, as noted above, the statutory language in HMDA contemplates data collection for loan purchases. Similarly, as interpreted by the agencies administering CRA, the CRA statute permits banks to fulfill their obligation to meet local credit needs by lending in low-to-moderate income communities or by purchasing loans made by others. Conversely, section 1071 does not contain such language; it is focused on applications as the trigger for data collection and reporting obligations. Thus, the Bureau concludes for this rule that it is appropriate for financial institutions to have reporting obligations on the basis of making credit decisions on applications, as explained further in the section-by-section analysis of § 1002.109(a)(3)—a subsequent purchase of a loan (or an interest in a pool of loans, or a partial interest in a loan) is not, in itself, reportable.

104(b)(4) Public Utilities Credit

As noted above, the existing definition of business credit in § 1002.2(g) partially excludes public utilities credit, securities credit, incidental credit, and government credit, as defined in existing § 1002.3(a) through (d), from requirements of existing Regulation B. For the purpose of proposed subpart B, the Bureau proposed complete exclusions for public utilities credit from the definition of a covered credit transaction in proposed § 1002.104(b). The Bureau also proposed to define business credit in proposed § 1002.102(d) by reference to existing § 1002.2(g), which already excludes public utilities credit. The Bureau sought comment on its proposal to exclude public utilities credit but did not receive any comments in response.

For the reasons set forth herein, the Bureau is finalizing § 1002.104(b)(2) as proposed. Section 1002.104(b)(2) excludes 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 to public utilities credit transactions. 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—is not excepted under § 1002.104(b)(2) but may be excepted if it constitutes trade credit under § 1002.104(b)(1), or in the example of financing for certain home improvements, if it does not constitute an extension of business credit under § 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 adopting a definition of “covered credit transaction” that only covers business credit and that fully 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, as well as its authority under ECOA 704B(g)(2) 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 statute's requirements, as the Bureau deems necessary or appropriate to carry out the purposes of section 1071. The Bureau believes that fully excluding public utilities credit from the rule is reasonable for the same reasons as the Board enumerated when it adopted exemptions from certain procedural requirements under subpart A. Specifically, covering public utilities credit under this rule could potentially result in “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].” 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 excluding it from coverage under subpart B for the same reasons.

104(b)(5) Securities Credit

As noted above, the existing definition of business credit in § 1002.2(g) partially excludes public utilities credit, securities credit, incidental credit, and government credit, as defined in existing § 1002.3(a) through (d), from requirements of existing Regulation B. For the purpose of proposed subpart B, the Bureau proposed complete exclusions for securities credit from the definition of a covered credit transaction in proposed § 1002.104(b). The Bureau sought comment on its proposal to exclude securities credit but did not receive any comments in response.

For the reasons set forth herein, the Bureau is finalizing § 1002.104(b)(3) as proposed. Section 1002.104(b)(3) excludes 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.

The Bureau is adopting a definition of “covered credit transaction” that only covers business credit and that fully 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, as well as its authority under ECOA 704B(g)(2) 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 statute's requirements, as the Bureau deems necessary or appropriate to carry out the purposes of section 1071. The Bureau is excluding securities credit to foster consistency with existing Regulation B.

104(b)(6) Incidental Credit

As noted above, the existing definition of business credit in § 1002.2(g) partially excludes public utilities credit, securities credit, incidental credit, and government credit, as defined in existing § 1002.3(a) through (d), from requirements of existing Regulation B. For the purpose of proposed subpart B, the Bureau proposed complete exclusions for incidental credit from the definition of a covered credit transaction in proposed § 1002.104(b).

As the Bureau explained in the NPRM, existing § 1002.3(c)(1) states that incidental credit refers to extensions of consumer credit other than public utilities and securities credit (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. For example, 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 Regulation B, even though there is no finance charge and no agreement for payment in installments—meaning that it would not be covered under Regulation Z. Such extensions of incidental credit are excepted from compliance with certain procedural requirements as specified in existing § 1002.3(c). The Board created these exceptions in response to commenters that urged it 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.”

The Bureau sought comment on its proposal to exclude incidental credit and it received one industry comment in support of the proposed exclusion.

For the reasons set forth herein, the Bureau is finalizing § 1002.104(b)(4) as proposed. The Bureau is adopting a definition of “covered credit transaction” that only covers business credit and that fully 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, as well as its authority under 704B(g)(2) 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 statute's requirements, as the Bureau deems necessary or appropriate to carry out the purposes of 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. Additionally, the Bureau believes that providers of incidental credit may not intend to extend credit and may not currently manage compliance with regulatory requirements associated with making extensions of credit. The Bureau believes an exclusion is appropriate to further the business and community development purpose of section 1071 because of the likelihood that these entities may incur large costs relative to their size to collect and report 1071 data in an accurate and consistent manner, which could result in entities limiting credit to their small business customers or in potential data quality issues.

Government Credit

The existing definition of business credit in § 1002.2(g) partially 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 existing Regulation B.

In its NPRM, the Bureau did not propose in § 1002.104(b) to separately 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 sought comment on its approach to government credit but did not receive any comments on this aspect of the proposal. For the purpose of subpart B, the Bureau is finalizing complete exclusions for public utilities credit, securities credit, and incidental credit from the definition of a covered credit transaction in final § 1002.104(b), as described above, but is not adopting a similar exclusion for government credit. The Bureau is finalizing its approach because it 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 final rule.

Additional Requested Exclusions

The Bureau received numerous comments requesting the Bureau exclude additional products from coverage under the rule. These comments and the Bureau's response are discussed below.

Point-of-sale transactions. A trade association urged the Bureau to fully exempt point-of-sale transactions from the rule, arguing that data collected in connection with such transactions would be inaccurate. In the alternative, this commenter suggested an exception from the requirement to obtain principal owners' ethnicity, race, and sex information, for credit lines below $50,000. As discussed in the section-by-section analysis of § 1002.107(c), the Bureau does not believe it would be appropriate to categorically exempt point-of-sale transactions. The Bureau also is not adopting a minimum transaction amount threshold, as discussed below.

Minimum transaction amount threshold. Some industry commenters requested the Bureau exempt all credit transactions from section 1071 collection and reporting requirements if they fell below a certain minimum transaction threshold. One commenter asked the Bureau to adopt a de minimis loan amount exemption of at least $1 million to soften the rule's impact on small entities and borrowers. A credit union stated that the Bureau should implement a minimum loan amount of $10 million. Some banks urged an exemption for “small loans” under $25,000, asserting a need to help institutions, especially smaller institutions, keep compliance costs down and ensure these credit products remain available to the small and agricultural businesses who need them most.

Some industry commenters, including several credit union trade associations, requested an exemption for credit transactions under $50,000. A few commenters argued such an exemption was needed for consistency with National Credit Union Administration regulations, which impose a $50,000 threshold for reporting member business loans. Two credit union trade associations argued that failing to exempt such loans would reduce their availability and also reflects a substantial underestimation of the full impact of the proposed covered financial institution threshold. Several trade associations also recommended the Bureau permit voluntary reporting of loans below $50,000. A bank stated that a $50,000 threshold would result in a significant improvement that would still allow the Bureau to obtain meaningful data. Another bank maintained that this exclusion was needed to reduce compliance burdens related to small loans that are not profitable but that are important to communities. On the other hand, another commenter stressed the importance of supporting access to microloans for financing start-up or growth and suggested separating microloans ($50,000 or less) into a separate category.

A few industry commenters suggested exempting loans under $100,000. These commenters generally argued that such an exemption was needed to keep the cost of loan origination lower for small dollar borrowers, thereby helping to make more borrowers eligible for credit. Several industry commenters urged the Bureau adopt a minimum transaction amount threshold, without specifying a dollar amount. One of these commenters noted that, due to price inflation, $100,000 would be too small of an amount for such a threshold and that if a threshold were established, it would need to be per loan and not cumulative.

For the reasons set forth herein, the Bureau is not adopting an exemption for credit transactions below a certain dollar threshold. At the time of the Federal Reserve Banks' 2021 survey of employer firms, 60 percent of employer firms had $100,000 or less in outstanding debt, with 48 percent of such firms holding $50,000 or less in outstanding debt. According to SBA data, more than 87 percent of Paycheck Protection Program loans in 2021 were loans of $50,000 and below, and approximately 20 percent of SBA 7(a) loans between 2010 and 2019 were in amounts less than $25,000. In terms of industry adoption of minimum loan amount thresholds, research by the FDIC shows that only a small share (14.8 percent) of small banks require a minimum loan amount for their top loan product to small businesses, compared with a majority (69.8 percent) of large banks. Moreover, as discussed in the section-by-section analysis of § 1002.106(b)(1), the Bureau believes that loan size a poor proxy for small business size—in fact, FDIC staff found “at least $19.1 billion in gross understatement of small business lending (in which small businesses with less than $1 million in gross annual revenue received loans with amounts greater than $1 million).” Based on this information, the Bureau does not believe that adopting a minimum transaction amount threshold would further the purposes of section 1071 because it would exclude substantial portions of small business lending.

Vehicle financing. One bank urged the Bureau to specify that any motor vehicle financed in the first instance by retail motor vehicle dealers are deemed consumer loans and thus exempt. A vehicle leasing trade association also suggested that vehicle financing was so similar to consumer lending that it should be exempt from section 1071 reporting requirements.

The Bureau is not categorically exempting business-purpose vehicle financing, even though it may often be offered alongside consumer-purpose credit. Per existing comment 2(g)–1, the test for deciding whether a transaction qualifies as business credit is one of primary purpose. Where a small business applies for vehicle financing primarily for business or commercial (including agricultural) purposes from a covered financial institution, the transaction is reportable. For a broader discussion of vehicle financing with respect to reporting obligations where multiple financial institutions are involved in a covered credit transaction, see the section-by-section analysis of § 1002.109(a)(3).

Letters of credit. A bank asked the Bureau to clarify if letters of credit are covered credit transactions for purposes of section 1071, and if they are, this commenter also recommended that the Bureau exclude these types of transactions from reporting.

The Bureau understands that letters of credit products are primarily used in the international trade context. Generally, a letter of credit is an instrument issued by a bank that promises, upon the presentation of certain documents and/or satisfaction of certain conditions, to direct payment to a beneficiary of the instrument. Letters of credit are often presented by buyers of goods who seek to postpone payment until their goods have been received. Some letters of credit are secured by a promissory note and are converted if the customer fails to pay.

ECOA and Regulation B do not address letters of credit. Regulation Z excludes letters of credit under its comment 2(a)(14)–1.vi. In finalizing this exclusion, the Board stated that “[i]ssuance of letters of credit and execution of option contracts are not extensions of credit, although there may be an extension of credit when the letter of credit is presented for payment or the option is exercised, if there is a deferral of the payment of a debt at that time.” The Bureau agrees with the Board's assessment of these products and believes that a letter of credit is not credit under ECOA. Thus, the Bureau is not covering letters of credit under the final rule.

Government programs. Some industry commenters urged the Bureau to exempt government lending programs (such as the Paycheck Protection Program) and/or government sponsored/guaranteed loans (such as USDA loans), arguing that inclusion would discourage participation. One also argued that the fact that the fees and interest rates for Paycheck Protection Program loans were set by Congress, meant there was a reduced risk of discriminatory lending practices related to terms of the credit transaction. Another suggested that 1071 data collection and reporting was not required because many government programs already collected similar information. A few commenters specifically recommended exempting SBA lending programs, particularly section 504 loans.

The Bureau has considered these comments but is not categorically exempting credit transactions originated by, sponsored by, facilitated by, or guaranteed by government entities. According to one source, there are 65 government-sponsored, grants, loans, and programs that may benefit small businesses. The Bureau understands that many small businesses rely on government programs for credit and believes that excluding such credit in this final rule would not further either of section 1071's statutory purposes.

C–PACE loans. A trade association of Commercial Property Assessed Clean Energy (C–PACE) loan providers requested an exemption due to purportedly unique features of C–PACE loans, such as prior approval by the local government, absence of acceleration, lack of control over the identity of the obligor, and absence of private remedies.

C–PACE programs generally allow commercial property owners, which could include small businesses, to receive financing to fund clean-energy, seismic strengthening, or water conservation improvements to their properties. The financial obligation arises from voluntary contract. Various private companies appear to play a significant role in financing, originating, and administering C–PACE transactions. Under State law, C–PACE is an assessment that appears on businesses' property tax bills. Although the commercial property owner signs the financing agreement, it is typically not a personal liability of the commercial property owner, and the obligation will stay with the property until fully paid. C–PACE is secured by a super-priority lien on the property—if the property is sold through foreclosure, C–PACE (like a regular property tax lien) is first in line to receive any proceeds from the sale even if a mortgage was on the property first. The Bureau understands that typically, only the arrearage on the C–PACE lien gets paid off in foreclosure, and the rest of the C–PACE indebtedness remains with the property after foreclosure.

While publicly available data on C–PACE programs appear to be limited, the Bureau understands that these programs are growing in popularity; excluding these loan products from the requirements of this rule would result in incomplete data about the relevant markets and would thus not advance section 1071's business and community development purpose.

The Bureau is not excluding C–PACE financing arrangements from reporting under section 1071, as requested by one commenter. Based on its understanding of typical C–PACE financing arrangements and its expertise with respect to the nature of credit transactions, the Bureau believes that the term “credit” under ECOA and final § 1002.102(i) encompasses these products. Under a C–PACE financing arrangement, there is (1) a “debt” in the form of an obligation to pay for the cost of property upgrades and (2) a right to defer payment on that obligation for a term. Similarly, there is (1) a “purchase[] [of] property or services” in the form of property upgrades, and (2) a right to defer payment on the property or services. The borrower enters into C–PACE financing through a voluntary transaction. That the parties agree that payment will be made through an assessment through the property tax system does not change the Bureau's analysis. ECOA (and Regulation B) do not specify a particular vehicle or form of payment for a transaction to constitute credit, nor do they limit the form of obligation. The Bureau is not specifically defining C–PACE financing arrangements in the rule because the Bureau believes these products are covered by the definition of “credit” in final § 1002.102(i).

Finally, in the Bureau's judgment, an exclusion of C–PACE loans—whether by interpretation or by granting an exception—would not further the fair lending and the business and community development purposes of section 1071. This is for three independent reasons. First, while the Bureau understands that C–PACE financing may present less fair lending risk compared to some other products because such financing is based on the value of the property, not the creditworthiness of the obligor (who can change along with ownership of the property), the Bureau does not believe that is a sufficient reason by itself to exclude C–PACE lending from coverage under this final rule. Section 1071 is not limited to those products with the highest fair lending risk. Second, the Bureau does not agree that data collection to provide additional insight into the product is unnecessary. Third, and most significantly, including C–PACE loans should create a more level playing field across financial institutions that provide construction financing to small businesses as well as create a dataset that better reflects demand for such financing by the smallest and most vulnerable businesses.

Overdraft lines of credit. In its NPRM, the Bureau did not address overdraft lines of credit other than asking whether they should be listed as a credit product separate from other lines of credit. The Bureau received one comment urging exclusion of overdraft lines of credit on the grounds that their inclusion would significantly expand the data collection requirements for small business deposit account applications since most such deposit accounts have an option to obtain an overdraft line of credit. This commenter also argued that collecting data on overdraft lines of credit would not further section 1071's purpose of preventing discrimination against small business credit applicants because banks conduct little, if any, underwriting when extending overdraft lines of credit on small business deposit accounts.

The Bureau is not categorically exempting overdraft lines of credit but notes that they are reportable only where there is an “application” under § 1002.103. Providing occasional overdraft services as part of a deposit account offering would not be reported for the purpose of subpart B pursuant to new comment 107(a)(6)–8.

Voluntary Reporting

Absent a specific requirement to collect protected demographic data (such as in section 1071), ECOA generally blocks collection of such demographic data in connection with an application for credit. The Bureau sought comment on whether financial institutions should be permitted to voluntarily collect and report applicants' protected demographic information for transactions such as leases (due to the practical difficulty cited by some stakeholders of distinguishing leases from loans), consumer-designated credit (when financial institutions have reason to believe the credit might be used for business purposes), and real estate investment loan transactions that are secured by non-owner occupied 1–4 dwelling unit properties pursuant to proposed § 1002.109.

The Bureau received comments from community groups and trade associations on this aspect of the proposal. A number of community groups stated that the Bureau should permit voluntary reporting on leases and factoring to have the most comprehensive data on the small business financing market as it relates to minority entrepreneurs. A community group purporting to address the proposed amendments to existing § 1002.5(a)(4) commented that the Bureau should permit voluntary collection not only by financial institutions not covered by the rule, but also should permit covered financial institutions to collect data on consumer credit used to fund small businesses.

The Bureau did not receive any industry comments expressing an interest in being able to voluntarily report non-covered products. In fact, a few trade associations and a business advocacy group expressly opposed such voluntary reporting. One trade association argued against voluntary reporting of non-covered transactions, citing concerns about the quality of data collected and the creation of an uneven playing field among financial institutions that would contribute to misinterpretations of the data by observers. Two other commenters also argued against the voluntary reporting of consumer-designated credit used for business purposes, asserting that such reporting would create confusion, introduce the possibility of error, and put financial institutions in a position to question their members' intentions.

For the reasons set forth herein, the Bureau is finalizing its approach to not permit voluntary reporting of non-covered products. The Bureau sought comment on voluntary reporting to address a potential pain point for industry but heard no industry interest in such a solution. The Bureau thus finds it unnecessary to change the proposed section 1071 collection system to receive data on such non-covered products. However, as discussed in the section-by-section analysis of § 1002.112(c)(3), the Bureau is adopting a catch-all safe harbor that will protect financial institutions who encounter the underlying situation that voluntary reporting was intended to address. Specifically, that safe harbor will address situations where a financial institution has a reasonable basis—at the time of collecting the protected demographic information required by this rule—to believe there is a covered application and that data collection is necessary, including situations in which it later determines that the transaction is not in fact reportable (because the ultimate transaction is not a covered product, the business is not small, or there is otherwise not a covered application).

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 finalizing a definition of financial institution in § 1002.105(a) consistent with that statutory language. The Bureau is defining a covered financial institution in § 1002.105(b) as a financial institution that originated at least 100 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 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 limit their small business lending activity because of the fixed costs of coming into compliance with this rule.

The Bureau is finalizing § 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 finalizing § 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 finalizing these provisions and using its exemption authority under 704B(g)(2) for the reasons set forth below.

105(a) Financial Institution

Proposed Rule

ECOA section 704B(h)(1) defines the term “financial institution,” for purposes of section 1071, as “any partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative organization, or other entity that engages in any financial activity.” Existing Regulation B, which implements ECOA, has not otherwise defined this term.

Proposed § 1002.105(a) would have restated the statutory definition of 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. The Bureau believed 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), online lenders, platform lenders, CDFIs, Farm Credit System lenders, 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 noted that the broad scope of what may be considered a “financial activity” in the proposed definition of financial institution would not be 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 the rule's data collection and reporting requirements.

Proposed comment 105(a)–1 would have provided a list of examples of entities that may fit within the definition of a financial institution. This proposed comment would have made 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. Proposed comment 105(a)–2 would have referred to proposed § 1002.101(a) to reiterate the statutory exclusion for motor vehicle dealers.

The Bureau sought comment on this proposed definition of a financial institution, and generally requested comment on whether additional clarification is needed.

Comments Received

A broad range of commenters, including lenders, trade associations, community groups, and business advocacy groups, expressed support for the Bureau's proposed general definition of financial institution. A number of commenters stated that it is an appropriately broad definition that captures a wide variety of lenders, including online lenders, platform lenders, lenders involved in equipment and vehicle financing, and commercial finance companies. Commenters asserted that a broad definition will yield meaningful data. Several commenters noted that capturing a broad array of lenders is essential for achieving the objectives of section 1071 and that a broad definition is important for regulatory parity. Other commenters stated that there should be no exceptions permitted for certain types of lenders and a community group stated that missing any segment of lending risks encouraging abusive lending institutions to violate fair lending laws. One trade association expressed opposition to the proposed definition, however, arguing that it is too broad because it includes captive vehicle finance partners.

Several commenters agreed that the rule must apply to government lenders, with one commenter specifically requesting inclusion of the Farm Service Agency. An association urged the Bureau to include as examples in the rule the largest Federal, State, and municipal lending programs.

Another trade association stated that SBA certified development companies are certified and regulated by the SBA, and the SBA already collects application information that includes the data points that the Bureau proposes to collect. The commenter further asserted that reproducing these data will likely incur significant one time and ongoing compliance costs. In contrast, a bank stated that data shows that the performance levels of the SBA and the lenders participating in their programs has produced dismal results, permitting some lenders to enjoy “preferred” lender status while not delivering loans to disadvantaged communities. Moreover, two commenters urged the Bureau to work with other government agencies to ensure that existing reporting is leveraged where possible.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.105(a) and its associated commentary as proposed. The Bureau emphasizes that the list of examples of entities in comment 105(a)–1 is not exhaustive and that other entities not specifically described may nonetheless fit within the definition of a financial institution under § 1002.105(a). The Bureau agrees with commenters that governmental lenders should be covered by the rule. As explained in the proposed rule, the Bureau interprets the statute to include government entities in the definition of 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 “or other entity” were ambiguous, the Bureau believes—based on its expertise and experience—that interpreting it to encompass governments and government entities promotes the purposes of section 1071.

For example, the Bureau believes that it will be helpful to identify the business and community development needs and opportunities of small businesses, including those that are women-owned, minority-owned, and LGBTQI+-owned, 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 “financial institution” in ECOA section 704B(h)(1), cover all companies and corporations, including government-owned or -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 advances the purposes of section 1071, particularly the business and community development purpose, as it will more accurately capture demand for credit.

The Bureau is not, however, listing specific examples of covered governmental lenders/programs in the rule. The Bureau does not believe such a list is necessary, and inclusion of a specific list could cause confusion if the listed programs (or those lenders' loan volumes) were to change.

In response to commenters who raised potential overlap with other reporting regimes, see part V.D.3 for a detailed discussion of this issue.

Commenters' requests for specific exclusions, such as for captive vehicle finance partners, are discussed in the section-by-section analysis of § 1002.105(b) below.

105(b) Covered Financial Institution

Background

Throughout the rulemaking process, the Bureau has received requests to adopt a variety of exemptions from collection and reporting requirements under section 1071. Reasons cited have included discouraging market disruption, 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 the rule.

As detailed below, the Bureau is adopting an activity-based exemption. The Bureau defines a covered financial institution in § 1002.105(b) as a financial institution that originated at least 100 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 will be required to collect and report small business lending data under this rule. The final rule does not include categorical exemptions for particular types of institutions from coverage, but the Bureau notes that its Regulation B does not apply to motor vehicle dealers.

Proposed Rule

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. The Bureau explained that in light of section 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 limit their small business lending activity because of the fixed costs of coming into compliance with the rule. The Bureau stated that this result could be contrary to the community development purpose of section 1071.

In the NPRM, the Bureau stated that it believed 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. The Bureau believed that furnishing a dual activity-based and asset-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 believed that a dual threshold would create more regulatory complexity as compared to only tracking total annual small business originations.

In particular, the Bureau believed 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 wished to ensure that infrequent lenders were not incurring significant undue compliance costs, particularly while not reporting data. In general, tracking two thresholds is more complex than tracking one. The Bureau believed it is also more likely that financial institutions are already tracking total originations. The Bureau believed 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.

Activity threshold level. Proposed § 1002.105(b) would have defined 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. 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 subpart B.

The Bureau believed this definition would facilitate compliance by describing which financial institutions are required to collect and report small business data. The Bureau also proposed commentary to accompany proposed § 1002.105(b). In general, the Bureau believed 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 proposed to exempt certain financial institutions from its small business lending rule because it remained concerned that financial institutions with the lowest volume of small business lending might limit their small business lending activity due to the fixed costs of coming into compliance with the rule. That type of market disruption could run contrary to the business and 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.” In the Bureau's view, ensuring that business and community development opportunities could be met as well as identified supported the Bureau's use of its exemption authority under 704B(g)(2) here.

The Bureau proposed to set the activity-based threshold based on small business originations, rather than applications. The statutory language of section 1071 generally applies to applications; however, the Bureau believed that using small business originations for purposes of defining a covered financial institution is the better approach. The Bureau expected that financial institutions track their small business application volumes in various ways, but whether an origination resulted was a clear and readily identifiable metric. Using an exemption metric based on applications would have imposed new obligations on financial institutions solely for purposes of determining whether or not they are subject to this rule. As discussed above, the Bureau believed that proposing an activity-based threshold that employed 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 proposed to define covered applications for purposes of proposed subpart B. Using the number of originations, as opposed to applications, for an activity-based threshold was also consistent with the Bureau's Regulation C.

The Bureau proposed 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 believed that providing this clarifying language would assist financial institutions in understanding which transactions count towards the loan-volume threshold. This approach was consistent with the Bureau's proposed § 1002.109(a)(3).

Proposed comments 105(b)–4 and –5 would have explained when a financial institution was a covered financial institution following a merger or acquisition. These proposed comments were largely consistent with the Bureau's approach to reporting obligations surrounding a merger under Regulation C, with modifications to reflect the nature of the small business lending market and to provide additional clarifications.

Proposed comment 105(b)–6 would have clarified that Regulation B (including proposed subpart B) generally did not apply to lending activities that occur outside the United States.

Finally, proposed comment 105(b)–7 would have addressed 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 have reiterated that proposed § 1002.5(a)(4)(vii) through (ix) permitted a creditor that was 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 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 have further stated that if a creditor was 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 sought comment on its proposed 25 originations threshold incorporated into the definition of a covered financial institution. The Bureau also solicited comment on whether this threshold should alternatively be set at 50 or 100 covered credit transactions. In addition, the Bureau sought comment on whether an activity-based threshold should be based on the total number of small business applications, rather than originations. The Bureau also requested comment on whether additional clarification was needed for this proposed definition.

Two-year threshold measurement period. The Bureau proposed to define a covered financial institution using a loan-volume threshold that must be achieved in each of the two preceding calendar years.

The Bureau acknowledged 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 believed that two years was 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 section 1071's purposes. The Bureau believed that a two-year threshold period was 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 VIII below, in order to comply with the Bureau's 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 believed it 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 noted 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 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 recognized, however, that triggering data collection and reporting requirements based on lenders' estimates of their projected future volume could be challenging to implement.

The proposed two-year threshold period could pose other challenges for financial institutions that conduct small business lending activity near the proposed 25 small business originations threshold. See the section-by-section analysis of § 1002.5(a)(4) above for a discussion of § 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 § 1002.114(c)(2) below for discussion of additional flexibility that the Bureau is finalizing regarding measuring lending activity prior to the rule's compliance date.

Proposed comment 105(b)–1 would have clarified the meaning of a preceding calendar year for purposes of the proposed activity-based threshold. See the section-by-section analysis of § 1002.114(c)(3) below for additional discussion regarding measuring lending activity prior to the rule's compliance date. Proposed comment 105(b)–2 would have emphasized 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 have explained 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).

Other requested exemptions. The Bureau did not propose to adopt alternative exemptions or exceptions to the definition of covered financial institution, other than the loan-volume threshold as described above.

With respect to government lenders, in the proposal the Bureau stated that it has not identified, nor did small entity representatives or other stakeholders provide, policy or legal rationales for excluding government lenders from the rule. The Bureau believed that collecting information on small business lending by government entities furthered the purposes of section 1071. Moreover, the Bureau believed, as described above in the discussion of proposed comment 105(a)–1, that government entities were included within the phrase “other entity” in the ECOA section 704B(h)(1) definition of “financial institution.” For example, the Bureau believed that it would 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 did not believe that exempting not-for-profit lenders from data collection was consistent with the purposes of section 1071. The Bureau believed 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.

With respect to the concern that certain financial institutions may encounter difficulty absorbing compliance costs, the Bureau believed that directly considering a financial institution's activity is a more appropriate way to address this concern and not a categorical exemption. With respect to a financial institution's lending importance for a community or region (such as low income or rural) as a reason to include categorical exemptions, the Bureau believed 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 the concern that certain business models or products are not conducive to data collection or reporting, the Bureau believed it would most appropriately address such concerns by providing clarification regarding how reporting rules apply to certain covered credit transactions and also not covering certain transactions. See the section-by-section analyses of §§ 1002.104(b) and 1002.109(a)(3). The Bureau proposed comment 105(a)–1, discussed above, consistent with the considerations discussed here.

Therefore, for the reasons described above, the Bureau did not propose to define a covered financial institution by providing alternative exemptions or exceptions. The Bureau sought comment on this approach, including data or information that might bear upon any such alternative exemptions in light of section 1071's purposes.

Comments Received

Commenters expressed a variety of perspectives with respect to the Bureau's proposal regarding potential exemptions. Feedback from most industry commenters generally was in support of exempting certain financial institutions from data collection and reporting obligations. Most feedback in support of pursuing exemptions focused on the potential burden of new regulatory requirements, with some commenters cautioning that collection and reporting obligations could lead to an increase in the cost of credit and could cause lenders to exit the market. A few commenters connected these potential costs with section 1071's purpose of identifying business and 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. In addition, many commenters, mostly community groups, urged caution with respect to the extent of any such exemptions, arguing that not capturing a significant amount of small business lending data would run contrary to the general purposes of section 1071.

Activity-based exemption. Many commenters supported the general concept of an activity-based threshold. A large bank asserted that an origination-based approach would ensure that collected data represents a comprehensive view of the small business lending landscape. A few commenters stated that a clear, bright line rule is helpful, and that an activity threshold is relatively simple for low-volume lenders to apply. Moreover, two commenters said that an activity threshold creates a level playing field, while a CDFI lender stated that such an approach will ensure that the Bureau captures data from lenders that are small in asset size but active in small business lending. Two commenters, however, noted that some lenders may not currently track applicant GAR and this may somewhat increase burden of counting originations to small businesses.

A community group urged the Bureau to guard against evasion of the activity-based threshold through the creation of subsidiaries, stating that the Bureau should include a rule that for the purposes of determining the loan threshold, loans are counted at the parent institution or holding company level.

A number of commenters opposed an activity-based threshold. Two banks stated that it was confusing because the threshold is only for originations, yet all applications are reported. One of the banks stated that a financial institution may not know whether it would meet the threshold until very close to the reporting period, while another bank stated it may be difficult to know which loans are covered for purposes of determining loan activity.

Several industry commenters asserted that an activity-based threshold is not a good metric for banks, with several banks suggesting that an asset-size coverage definition would be more straightforward and consistent. Commenters explained that lending varies each year, while assets are more predictable and forecastable. A few community banks stated that an activity-based threshold based solely on originations is misguided and results in a one-size-fits-all exemption that disregards the unique characteristics that exist in communities across the country, resulting in reduced access to credit. Several industry commenters stated that an activity-based threshold could encourage lenders to deny applications or reduce their lending to stay under the threshold. Additionally, several commenters noted that some lenders near the threshold may go back and forth between being covered or not.

Counting originations. Several lenders, trade associations, and a community group, expressed support for counting originations, not applications, for determining coverage. The community group asserted that this approach is consistent with CRA and HMDA.

A few commenters provided feedback on how originations should be counted for purposes of determining the threshold. A trade association asserted that all Paycheck Protection Program loans and similar future government programs should be exempt from the originations threshold. In addition, two commenters stated that additional credit amounts, such as line increases, should not count as a separate credit product for purposes of counting originations for the threshold. One noted that very small businesses may request multiple line increases in a year.

Activity threshold level. The Bureau received a large number of comments regarding the activity threshold level from a range of stakeholders, including lenders and community groups. Many community groups and some industry commenters, including community-oriented lenders and a few large banks, along with a minority business advocacy group and several members of Congress, supported the proposed 25 loan threshold, citing its broad coverage. Commenters stated that the proposed threshold allows for coverage of banks, nondepository lenders, “fintech” lenders, CDFIs, and other types of financial institutions. A community-oriented lender argued that gathering data from small business lenders or all types and sizes is critical, given that entrepreneurs of color are less likely to be approved for capital by banks, often turning to alternative lenders as a result. Another commenter stated that even a 25-origination lender will have substantial data with respect to adverse actions or declinations, up to four times as much.

Commenters asserted that this threshold was an appropriate approach to excluding de minimis lenders, was simple to apply, and would yield meaningful data collection. A few commenters argued that the activity threshold should not be increased above 25 loans, given the Bureau's estimated costs of compliance. Some commenters cited similarities to the 2015 HMDA rule, with one commenter further asserting that when the HMDA threshold was raised, certain lenders no longer reported data. Commenters asserted that gathering robust lending data will ensure that the rule implementing section 1071 is fulfilling the statutory purposes and community development organizations need sufficient data that cover enough of the market. In addition, one commenter urged a 10-loan threshold, asserting that is the minimum threshold that is necessary to change lending behavior and improve access to capital for Black business borrowers. This commenter further asserted that all regulated financial institutions that maintain FDIC deposit insurance should report their small business lending results.

Many commenters, including community groups, community-oriented lenders, individual commenters, and a business advocacy group, emphasized that section 1071's statutory purposes could be frustrated if the threshold were increased. Commenters argued that it would be impossible to meet the statutory purposes of the rule unless most of the market is covered. A commenter further asserted that if the threshold were increased, the database would no longer be statistically representative of actual lending and would not be able to accurately reveal whether credit needs were being met in all communities. Commenters stated that increasing the threshold will disproportionately harm many small business owners, rural communities, banking deserts and redlined areas that may find that “small” lenders make up a significant portion of the local lending market. Commenters stated that accurately measuring access to credit, and pursuing fair lending enforcement when warranted, would be substantially diminished if too many lenders and loans are exempt from reporting, particularly in smaller cities and rural areas. Another commenter asserted that if the Bureau elected to use a higher threshold it would exclude gathering data from commercial lenders that are small, but still impact many people. Moreover, a commenter stated that the Bureau's estimates show decreased coverage of banks at higher thresholds.

Commenters stated that it is important to ensure coverage of rural areas, which may be in persistent poverty, and which are often served by small lenders. Moreover, a community group stated that the threshold must cover intermediate-sized banks, which are important to rural communities and small cities, and whose information has been missing from CRA data since 2003. Commenters stated that increasing the threshold could frustrate enforcement of the CRA, and risk the chance that the data are not representative of the actual small business lending landscape. A commenter further asserted that comprehensive data are needed to assist in fair lending actions at the local level.

In contrast, nearly all industry commenters opposed the proposed coverage threshold of 25 originations annually for two consecutive years. Commenters stated that the threshold was too low and would lead to increased costs and burden, particularly for community banks and credit unions. Numerous banks and trade associations expressed concern that too many small banks would be subject to the rule with a 25-loan activity threshold. For example, two trade associations asserted that at least 780 banks under $100 million in assets would be subject to reporting, and these institutions average 13 employees at 1.6 branches. In addition, several members of Congress asserted that the proposed threshold levels for the rule were far too stringent, and would drastically impact the ability of small institutions to make loans to small businesses and decrease access to credit for minority-owned, women-owned, and small businesses. Several commenters argued that small lenders have little data to offer relative to the costs of acquiring the data. One also asserted that it was unreasonable to subject thousands of additional small depository institutions to a complex and costly rule to collect data on approximately four percent of the small business lending market. Many of commenters suggested higher thresholds, with requests ranging from 100 to 1,000 transactions annually, using the same two-year test. In particular, a large number of commenters requested thresholds at 100, 200, 500, or 1,000 loans annually.

A number of industry commenters supported a 100-loan threshold. Many of these commenters urged the Bureau to set institutional coverage similar to HMDA at that time, both for consistency and because lenders already reporting HMDA data would incur lower compliance costs because they already have data collection systems in place. Moreover, commenters asserted that a 100-loan threshold would still capture an estimated 95 percent of businesses loans in the country.

Conversely, a CDFI lender and two business advocacy groups opposed a 100-loan threshold, arguing that the Bureau's estimates show narrower coverage of small business lending at that threshold level. Another CDFI lender stated that nearly a half billion in lending would be obscured from reporting in its community with a 100-loan threshold.

A credit union trade association stated that a 100-loan threshold was too low. This commenter asserted that researchers draw statistically significant conclusions from HMDA data which covers approximately 90 percent of the mortgage market, and because a 100-loan threshold covers more than that percentage of the small business market, the rule would gather more data than is necessary.

In the context of discussing the rule's threshold, numerous commenters, including community banks, credit unions, and trade associations, along with a group of State bank regulators, cautioned the Bureau regarding the risk of small lenders exiting the market due to the rule's burden. Commenters argued that the rule will damage small institutions' ability to remain competitive and would favor large lenders with large compliance teams. Many commenters stated that small community banks and credit unions lack the staff or resources, including automation capabilities, to comply with the reporting requirements, with numerous institutions sharing the limited number of full-time staff that they had dedicated to business and agricultural lending.

Commenters further argued that Dodd-Frank Act mortgage rules resulted in many community banks leaving the mortgage lending business, and this proposal would produce similar results. For example, several commenters argued that HMDA and TILA–RESPA integrated disclosure rules led to market exodus, and they were concerned that there would be similar market exit of local lenders following the proposed rule implementing section 1071. Commenters stated that communities could be left without a hometown bank and small businesses may seek credit from unregulated lenders. Moreover, two national trade associations stated that about 30 percent of surveyed franchised light-duty and commercial truck dealerships would discontinue small business credit extensions.

Several commenters also argued that the rule would exacerbate bank consolidation, particularly in rural and underserved areas, as the additional regulatory burden on community banks would lead to more mergers and acquisitions. Commenters further asserted that consolidation would reduce lending options for consumers and small businesses, and would discourage some smaller financial institutions from making small business loans. A few commenters stated that the rule would damage relationship banking and create an environment with less competition.

Numerous commenters also asserted that the rule is likely to reduce access to credit, as small banks and credit unions do not have the economies of scale to absorb the reporting costs, and thus compliance costs will be passed along to small business customers. Several commenters stated that they would have to reconsider their product offerings. For example, one bank stated that they might need to also reconsider their consumer product offerings and prices, and a credit union stated they might consider reducing lending to avoid being covered by the rule. In addition, one bank stated that they may need to charge additional fees for agricultural borrowers, while another bank stated that they would either need to increase their origination fee or greatly increase the minimum loan amounts. Another bank stated that as operating costs increase, they will be forced to adjust their business model by either increasing interest rates on loans, decreasing interest rates on deposits, or implement other account fees. Moreover, several commenters stated that the 25-loan threshold would limit small business lending flexibility, which could stifle lending innovation and result in lenders choosing to set minimum loan amounts.

In addition, many commenters argued that the 25-loan threshold would have a negative effect on lending in small and rural communities. Commenters stated that small banks, which are vulnerable to increased compliance costs, are often located in rural areas where lending options are limited. Several commenters stated that the rule risks underserved areas being afforded fewer loan options. Commenters further asserted that the rule's regulatory burden would drive consolidation in rural and underserved areas, limiting access to credit in these communities.

Several commenters drew comparisons to HMDA. One bank stated that when it was subject to HMDA reporting, they struggled with compliance and eventually elected to reduce lending. In addition, several commenters asserted that the proposed 25-loan threshold was inconsistent with the reporting threshold of 100 closed-end mortgages in Regulation C at the time. Commenters argued that although their institution was exempt from HMDA reporting, and although their commercial lending unit is small, they would not qualify for the proposed 25-origination exemption from reporting under section 1071. A State bankers association stated that half of their survey respondents are exempt from HMDA, while only six believed they would be exempt with a 25-loan threshold. The commenter further stated that these small financial institutions—83 percent under $250 million in assets—have no data collection infrastructure in place. Some other commenters similarly asserted that many smaller institutions do not have data collection infrastructure in place and stated that they would incur significant costs.

In addition, some commenters asserted that the Bureau did not provide a sufficient rationale for a 25-loan threshold, arguing that the Bureau has not shown why this threshold is necessary and appropriate to carry out section 1071's purposes. Several commenters argued that the Bureau could obtain sufficient data at a higher threshold. Another commenter stated that the Bureau did not fully consider coverage, in particular how much data would be forgone at each threshold. A group of trade associations further asserted that the Bureau is obligated to provide coverage estimates for nondepository institutions and that RFA estimates are not sufficient.

While the Bureau did not propose an asset-based threshold in the proposed rule, numerous industry commenters requested an asset size threshold, ranging from $50 million to $10 billion. However, some industry commenters as well as community groups counseled against an asset-based exemption, arguing that exemptions should be based instead on lending activity, and that size-based exemptions risked under-reporting in important markets. For example, one commenter stated that an asset-based threshold could affect different regions of the country and risk “blind spots” in the data. Some commenters said that assets are not an applicable measurement for many lenders, such as nondepository institutions. A bank trade association stated that asset-based exemptions have been exploited by market disruptors partnering with exempted institutions to create an uneven regulatory playing field.

Other requested exemptions. A number of commenters opposed exemptions for specific categories of lenders (consistent with the Bureau's proposal), with several commenters noting that capturing a broad array of lenders is essential for achieving the objectives of section 1071. Some commenters asserted that the rule must apply to government and public sector lenders, merchant cash advance companies, nondepository lenders, non-profit lenders, online lenders, and/or commercial finance providers. A State bankers association stated that the Bureau should specifically name industrial loan companies to make clear that all nonbank entities making small business loans are covered by the rule. Community groups asserted that all lenders are obligated to comply with fair lending laws, and requiring data disclosure will assist with ensuring compliance. Moreover, several industry commenters stated that a broad definition is important to ensure a level regulatory playing field and to ensure a comprehensive view of the entire small business lending market. A bank trade association urged the Bureau to pay close attention to nonbank lenders, which the commenter stated are roughly 30 percent of the current market and not currently subject to the Bureau's supervision.

In contrast, a large number of industry commenters urged the Bureau to exclude specific types of entities from coverage under the rule. Some requested that certain types of lenders such as credit unions or CDFIs be excluded from the rule entirely, while others requested certain indirect lending/multi-party business models be excluded, such as when applications are made via loan brokers, equipment dealers, or motor vehicle dealers. Numerous industry commenters noted the unique burdens they believed the rule would place on small banks and credit unions, while a subset of these commenters argued that the Bureau should exempt these smaller institutions from the rule altogether.

Several commenters requested an exemption for CDFIs, stating that they are mission-driven institutions and dedicating resources to new regulatory requirements would detract from their community focus. Moreover, some commenters argued that requiring CDFIs to report would be duplicative, as CDFIs already report lending data to the CDFI Fund that shows that they are providing financial products for small businesses in their communities. Commenters further cited the Treasury Department's certification process for CDFIs and stated that CDFIs are already held to a high standard. Several commenters cited that the Bureau decided to exempt CDFIs when implementing the Qualified Mortgage rule. Conversely, a number of community groups argued that the rule must apply to all financial institutions, including CDFIs.

A number of commenters urged the Bureau to exempt community banks from reporting requirements, stating that community banks already incur substantial regulatory burden and would be put at a competitive disadvantage under the rule. Several commenters emphasized the “high-contact and relationship-based business lending model” of community banks. A community bank asserted that community banks should be commended for advancing over 50 percent of the nation's small business loans and over 80 percent of the nation's agriculture loans despite holding less than 20 percent of the nation's deposits. Another community bank stated that currently they are not subject to HMDA or CRA reporting requirements and thus this rulemaking poses the threat of significant new burdens on small community banks as well as on those community banks that are already subject to HMDA reporting.

In addition, some commenters stated that covering community banks will have the opposite effect of section 1071's purposes. Commenters asserted that community banks would incur substantial burden in gathering new data, which would make it more burdensome and expensive to offer small business loans, thus raising the cost of credit. A community bank stated that, if adopted as written, the rule's paperwork burden will harm community banks, waste critical resources, and further restrict lending. Another community bank stated that the rule as proposed may very well be the final straw of regulation that will drive small community banks out of business with devastating impact on the small communities they serve. Moreover, commenters argued that the Bureau was designed to regulate large, complex financial institutions, not community banks.

Several commenters also urged the Bureau to exempt credit unions from reporting requirements, stating that credit unions have not demonstrated a pattern of unfair lending, that they seek to help women-owned and minority-owned businesses, and that credit unions are member-owned and not-for-profit. A trade association asserted that credit unions would like to furnish more small business loans, but a reporting regime will increase costs. Some commenters stated that exempting credit unions would allow them to remain competitive lenders and would avoid imposing new burdens on members. In contrast, a number of commenters—including community groups, community-oriented lenders, a business advocacy group, and a bank trade association—opposed special treatment for credit unions, citing a 2020 Federal Reserve study that shows a higher percentage of Black and Hispanic-owned firms sought loans from credit unions and CDFIs. In addition, a commenter stated that 2018–2020 HMDA data show that 73 percent of credit union lending in Mississippi went to white borrowers and 15 percent to Black borrowers.

One farm credit lender stated that Farm Credit System institutions should be exempt from collection and reporting, while another asserted that FCA financial institutions should have a qualified exemption that permits voluntary reporting. The latter commenter stated that these financial institutions are already reporting lending on Young, Beginning, and Small lending efforts and volume to the Farm Credit Administration. In addition, one commenter asserted that a lack of understanding of the Farm Credit System by the Bureau in this rulemaking will have unintended consequences for their customers. In contrast, a community group urged the Bureau to apply the rule implementing section 1071 to agricultural lenders, stating that historic discrimination against minority and disadvantaged groups has been well documented in agriculture, and including agricultural lenders will hold financial institutions accountable to equitably serving small farms and mid-sized farms, beginning farmers, and historically underserved farmers. Another community group asserted that Farm Service Agency activity should also be covered by the rule.

Several commenters requested an exemption for institutions outside of Metropolitan Statistical Areas, with many specifying that rural institutions should be exempt from the rule. Commenters stated that rural banks and credit unions often play a vital role in their communities and acquiring data from rural lending will result in fewer institutions willing to conduct rural lending. Several industry commenters asserted that the new burden to these institutions will increase the cost of credit, and will be a significant detriment for local small businesses seeking access to credit. A bank argued that many rural loans are small dollar loans to sole proprietors such as farmers and ranchers and without an exemption, the nation's most rural and remote borrowers will have a harder time obtaining credit for their businesses.

Two banks requested exemptions for CRA reporters, arguing that financial institutions subject to Board, FDIC, or OCC regulations under the CRA are already being assessed to ensure that they are identifying and meeting the credit needs of the small businesses in their communities. In addition, one of the banks stated that CRA-examined institutions with at least a satisfactory rating for its two previous exams should be exempt from reporting requirements. In contrast, another commenter opposed exempting CRA reporters, stating that big banks and “shadow lenders” have the most impact on small business lending and have thwarted the effective oversight and enforcement of the CRA.

The Federal Home Loan banks argued that they should be exempt from the rule, explaining that the proposed definition of covered financial institution inadvertently would capture lending to their financial institution member/borrowers because those members are small businesses. They stated that applying the rule implementing section 1071 to them is unnecessary in light of the comprehensive FHFA regulatory regime that applies to credit extended by the Federal Home Loan banks to their small and diverse financial institution members.

A trade association urged the Bureau to exempt SBA certified development companies from the rule, stating that these financial institutions are certified and regulated by the SBA and have a mission to assist small businesses with access to capital, including businesses in underserved communities. In addition, two development companies stated that they do not have the budget to incur these new reporting costs.

A few commenters requested an exemption for minority depository institutions. A national trade association asserted that Congress has determined that such institutions play an important role in serving underserved communities and minority populations, the intent behind section 1071 is already met by minority depository institutions, and therefore, the rule should not redundantly be applied to this special class of financial institutions. One bank stated that minority depository institutions are mission-driven to support their communities, while another bank asserted that these institutions are certified by the Treasury Department for serving historically underserved communities and/or low-to-moderate income Americans.

A trade association stated that retailers by their very nature are not financial institutions and thus should not be covered by the rule. The commenter further argued that applying this rule to retailers will have a negative impact on retail employees and customers as offering credit at retail could be reduced or eliminated, affecting overall access to credit. Moreover, the commenter stated that the retail environment is different from a typical bank, in that employees are not trained in the specifics of financial products, and the environment may not be practical for obtaining more sensitive information.

Two trade associations requested an exemption for loan brokers. One argued that there could be duplicative or inaccurate reporting in cases where technology companies match an applicant with multiple third-party lenders. The other argued that it is appropriate to have a similar approach to HMDA and data can be obtained from the lender instead of the broker.

Several commenters urged the Bureau to exempt indirect lending transactions where the applicant interacts only with a vendor partner, such as equipment dealers and manufacturers. Commenters argued that the financial institution does not directly interact with the applicant, only the dealer or manufacturer, and thus the fair lending purpose of section 1071 would not be furthered. A trade association asserted that such an exemption would be consistent with the Bureau's proposed approach to motor vehicle dealers. A business advocacy group stated that, alternatively, there should be flexibility with respect to the timing and collection of this information. They further argued that the equipment dealer or manufacturers' employees are not trained staff for the financial institution and the data may be less accurate.

Some commenters stated that indirect auto lenders should be exempt from the rule. One commenter stated that the Bureau should exclude motor vehicle dealers, and by extension, financial institutions when they are working with motor vehicle dealers. Two commenters stated that while indirect lenders may be involved in credit decisions, compliance with the rule would be difficult, as the financial institutions that evaluate and purchase the auto loan never meet the applicant. One also said that it was unclear what information indirect lenders would be required to gather.

In addition, two motor vehicle dealer trade associations urged the Bureau to exempt motor vehicle dealers. They argued that collecting new data will slow applications, raise compliance burden, and increase the risk of inaccurate data. They stated that motor vehicle dealers do not have the resources to comply with a rule in the manner that a financial institution would. Moreover, they stated that survey data indicates 30 percent of dealers might choose to leave the market rather than face these compliance costs. Two other trade associations pointed to Board regulations implementing ECOA and argued that the dealer would be prohibited under the law from asking the business owner for ethnicity, race, and sex demographic data. In addition, a bank expressed confusion over how a covered financial institution can require an exempt motor vehicle dealers to collect 1071 data. Another commenter noted that many dealers act as intermediaries between buyers and financial institutions, and requested that the Bureau work with small motor vehicle dealers to make the direct and indirect impacts of the rulemaking the least burdensome possible.

One State bankers association asserted that much valuable small business lending data will not be captured given the Dodd-Frank Act exclusion for motor vehicle dealers and urged the Bureau to advocate in Congress as necessary to include them in the rule.

A trade association urged the Bureau to exempt captive vehicle partners from reporting, arguing that these institutions are inextricably tied to entities that are exempt. The trade association further argued that it would be confusing in terms of reporting responsibility, as there are many creditors involved in a single loan and its subsequent assignment, and the finance partner does not directly interact with the applicant. Furthermore, the commenter stated that a lack of regulatory relief could lead to market exit and that captive finance companies are crucial to the economy.

Commenters urged the Bureau to exempt a variety of other entities, including institutions outside of direct CFPB supervisory authority, mission-driven banks, and financial institutions that identify as small businesses. In addition, some commenters urged the Bureau to adopt exemptions similar to HMDA using exemption factors such as asset size, location test, federally related test, and loan activity. One merchant cash advance provider stated that merchant cash advance funders should not be considered covered financial institutions because they do not extend credit or provide loans.

In addition, several commenters cited the firewall requirement and said that certain financial institutions should be exempted from the entire rule due to the challenges associated with the statutory firewall provision. One commenter said that banks under $1 billion should be exempted on this basis, a few said community banks should be exempted on this basis, and one commenter said that all but the largest lenders or all depository lenders should be exempted.

Two-year threshold measurement period. Commenters who addressed the issue were in support of a two-year threshold measurement period, with one community group citing its consistency with CRA and HMDA.

Final Rule

For the reasons set forth herein, the Bureau is revising § 1002.105(b) to set the activity-based coverage threshold at 100 originations in each of the two preceding calendar years, rather than 25 originations as proposed. The Bureau is also finalizing its proposal not to exempt particular types of institutions from the rule. The Bureau believes that a 100-loan activity threshold achieves section 1071's purposes while minimizing any risk that low volume small business lenders would reduce their lending activity. The Bureau is adding comments 105(b)–3 and -4, as explained below, as well as making other minor revisions to the commentary for additional clarity.

The Bureau is finalizing § 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.

Activity-based exemption. The activity-based threshold for coverage in the final rule will 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 the final rule. Furthermore, in comparison to an asset-based exemption or a dollar-volume threshold, the Bureau believes that an activity-based exemption is a more compelling basis for exempting certain financial institutions from coverage in light of section 1071's business and community development purpose.

While several commenters expressed support for an asset-based threshold or a dual asset-based and activity-based threshold, the Bureau believes an activity-based threshold is considerably less complex. Moreover, small business lending activity is more directly related to a given financial institution's role in the small business lending market than a measurement of the financial institution's size as measured in total assets.

In addition, the Bureau believes that an activity-based exemption is a superior approach to 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 commenters did not offer one. In addition, the Bureau agrees with commenters who stated that an asset-based exemption approach might create an uneven playing field and might risk presenting a cost disadvantage for other small financial institutions.

Moreover, exempting proportionately more depository institutions than nondepository institutions may present a challenge to the comprehensiveness of the small business applicants' demographic data collected under section 1071 as well as to the lending by different types of lenders. 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. Exempting depository institutions using an asset-based threshold and not similarly exempting nondepository institutions could run counter 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.

A few commenters asserted that an activity-based threshold could encourage lenders to deny applications or reduce their lending to stay under the threshold. These are speculative fears, but to the extent that institutions intend to take such action, the Bureau reminds financial institutions that inconsistencies in the way an institution applies its policies could give rise to a fair lending violation under ECOA. Denied applications must indicate the principal reason(s) for the adverse action, as required by § 1002.9(b)(2).

Regarding a commenter's concern about potential evasion of the activity-based threshold through the creation of subsidiaries, see the section-by-section analysis of § 1002.109(a)(2) which addresses reporting by subsidiaries.

Counting originations. The Bureau agrees with commenters who asserted that using a coverage threshold based on the number of originations rather than applications for purposes of defining a covered financial institution is the better approach. As one commenter pointed out, many financial institutions are already familiar with this approach due to its consistency with CRA and HMDA. Using originations provides a clear and readily identifiable metric for financial institutions. One commenter stated that the Paycheck Protection Program and similar future government programs should be exempt from the threshold. As discussed above, the Bureau is not exempting specific government programs from the activity-based threshold. However, by the time this rule is effective and implemented, lending activity conducted pursuant to the Paycheck Protection Program will have long since ceased and such loans will not be included in origination counts, rendering such commenter concerns moot.

In addition, the Bureau agrees with commenters who stated that additional credit amounts, such as line increases, should not count as a separate origination for purposes of counting the activity-based threshold. Financial institutions may receive multiple requests for additional credit amounts on existing accounts in any given year and such activity may make it more difficult for institutions to determine coverage under the rule. In order to address this issue, the Bureau is adding comment 105(b)–5 which clarifies that for purposes of determining coverage under § 1002.105(b), requests for additional credit amounts on an existing account are not counted as originations.

Moreover, as discussed in § 1002.106(b)(2), every five years the gross annual revenue threshold used to define a small business in § 1002.106(b)(1) shall be adjusted, if necessary, to account for inflation. The first time such an update could occur is early 2030, with an effective date of January 2031. The Bureau is adding comment 105(b)–4 to clarify how financial institutions reporting data should count originations in this situation, explaining that a financial institution seeking to determine whether it is a covered financial institution applies the gross annual revenue threshold that is in effect for each year it is evaluating.

Two-year threshold measurement period. Consistent with commenters who addressed the issue, the Bureau believes that a two-year threshold period is advisable to minimize uncertainty surrounding data collection responsibilities.

Activity threshold level. Supporters of the 25-loan threshold and supporters of the 100-loan threshold each argued that the Bureau should set the threshold with reference to the HMDA threshold for closed-end loans. Given the differences in statutory authorities and between home mortgages and small business loans, the Bureau does not believe that the activity-based thresholds implementing HMDA and section 1071 must be the same.

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. This information is based on FFIEC and NCUA Call Reports, as well as CRA submissions. 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 existing source data (limitations acknowledged by the congressional mandate of section 1071), the Bureau cautions that these estimates cannot provide a complete sense of the possible consequences of adopting each particular threshold. These estimates apply only to depository institutions.

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 (other than for Farm Credit System institutions based on their Call Report data ) such that the Bureau could provide similar estimates for comment. The Bureau requested in the NPRM such information and data that might bear on any activity-based exemption for nondepository institutions and did not receive any substantive information.

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. Because financial institutions' initial determinations of whether they are covered under this final rule, and if so into which compliance date tier they fall, will be based on 2022 and 2023 originations (see final § 1002.114(b)), institutions' Paycheck Protection Program lending activity will not factor into whether a given financial institution qualifies as a covered financial institution because such lending ceased in May 2021.

After considering the feedback from commenters, the Bureau seeks to minimize impact on the financial institutions with the lowest volume of small business lending due to the fixed costs of coming into compliance with this final rule. Numerous industry commenters cautioned the Bureau regarding the risk of market disruption due to the rule's burden and cost. Many argued that the relatively large fixed cost of complying with section 1071's data collection and reporting requirements would significantly increase the cost of small business credit. Commenters argued that the rule will damage small institutions' ability to remain competitive, would hasten consolidation, and would favor large lenders with large compliance teams. A number of lenders discussed the ways in which they may be forced to limit their lending, particularly in rural and underserved areas. Several lenders asserted that a 100-loan threshold was preferable, in part because HMDA reporters already have data collection infrastructure in place.

The Bureau stated in the NPRM that it was also considering a 50 or 100 origination threshold. After consideration of the comments, the Bureau believes that a 100-loan activity threshold is more appropriate. The Bureau believes that this adjustment will best address widespread industry concerns regarding compliance burdens for the smallest financial institutions and that it is consistent with the purposes of section 1071. A 100-loan threshold will ease compliance burdens for the smallest financial institutions and will still capture the overwhelming majority of the small business lending market, including the majority of agricultural lending. As demonstrated in Table 1, a 100-loan threshold captures nearly 95 percent of the share of small business loans originated by depository institutions. In short, while a 100-loan origination threshold decreases data coverage in comparison to a 25-loan origination threshold, a 100-loan origination threshold massively expands data availability relative to the status quo.

Other requested exemptions. The Bureau agrees with commenters who urged broad coverage of financial institutions under the rule. 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. The Bureau is not categorically exempting any particular type of financial institution from coverage. The Bureau believes that exemptions for any category of financial institution—whether credit unions, community banks, CDFIs, minority depository institutions, government lenders, non-profit lenders, agricultural lenders, retailers, or merchant cash advance providers—would create significant gaps in the data and would create an uneven playing field between different types of institutions. 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. Moreover, the Bureau believes that most policy arguments made by industry for being exempt from this rule are better addressed by adjusting the activity-based threshold to 100 originated loans. The higher activity threshold will help minimize compliance costs for all types of smaller financial institutions with lower lending volumes but still result in a comprehensive dataset that furthers section 1071's statutory purposes.

Comment 105(a)–2 refers to § 1002.101(a) to reiterate the statutory exclusion for motor vehicle dealers. Given the statutory exclusion, motor vehicle dealers are not required to report small business lending data to the Bureau. See the section-by-section analysis of § 1002.109(a)(3) for further discussion on reporting obligations where multiple financial institutions are involved in a covered credit transaction, including indirect lending transactions.

With respect to addressing the particularities of certain lending models, the Bureau is not categorically exempting particular financial institutions from coverage. The Bureau is, however, providing clarification regarding how reporting rules apply to certain covered credit transactions and is also not covering certain transactions. See the section-by-section analyses of §§ 1002.104(b) and 1002.109(a)(3). Regarding the request by some commenters to be exempted from this rule due to the statutory firewall requirement, see the section-by-section analysis of § 1002.108.

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. The Bureau is defining a small business consistent with the statutory language. In particular, the Bureau is defining a small business 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 subpart B, the Bureau is providing that a business is a small business if its gross annual revenue for its preceding fiscal year is $5 million or less. The SBA Administrator has approved the Bureau's use of this alternate small business size standard pursuant to the Small Business Act. The Bureau has also obtained approval for this gross annual revenue threshold to adjust, if need, for inflation or deflation every five years (after January 1, 2025) using the Consumer Price Index for All Urban Consumers (U.S. city average series for all items, not seasonally adjusted), rounded to the nearest multiple of $500,000.

Under the final rule, financial institutions will need to consider whether an applicant is a business under § 1002.106(a) and if the applicant is a business, whether it is small under § 1002.106(b). The Bureau believes that these definitions implement the statutory language of section 1071 while reflecting the need for a wide variety of financial institutions to apply a simple, broad definition of a small business that is practical across the many product types, application types, technology platforms, and applicants in the market.

For the reasons set forth below, the Bureau is adopting § 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. The Small Business Act provides a general definition of a “small business concern,” authorizes the 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.”

Proposed Rule

Proposed § 1002.106(a) would have defined 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. The SBA issued 13 CFR 121.105, entitled “How does SBA define `business concern or concern,'” pursuant to the Small Business Act. The Bureau referred to the entirety of that section for additional information. In particular, the Bureau noted that this definition would include 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.”

The Bureau sought comment on its proposed definition of a business, and generally sought comment on whether additional clarification is needed.

Comments Received

Comments received focused primarily on the Bureau's proposed business size standard, which are discussed in the section-by-section analysis of § 1002.106(b) below. The Bureau did receive some comments, however, on its proposed approach to the definition of business concern from a few banks, trade associations, a business advocacy group, and an online lender. These commenters requested that the Bureau consider certain modifications or adjustments to the definition of a business concern, such as clarifying that the term does not include non-profit entities, government agencies, certain trusts, foreign entities, and certain real estate holding companies.

One bank generally supported the proposed definition but requested clarification that the definition of business concern excludes “passive businesses” and non-natural borrowing entities that are established by applicants solely for tax, anonymity, and other such purposes not intended to earn profit through business production, operations, or service delivery. This commenter noted that it is common for consumer borrowers to establish limited liability companies or trusts solely to acquire properties and conduct similar transactions, or for use in remaining anonymous to preserve their physical safety, and requested that these scenarios be explicitly excluded because these entities' obligations and contributions do not align with those of small businesses.

A few commenters recommended that applications from nonprofit organizations also be exempted. A few commenters specifically requested the Bureau exclude any not-for-profit organizations, which might include non-operating entities, holding companies, trusts, special purpose vehicles, pass-through entities, holding companies that are not organized for profit, and limited liability companies that are not formed for business purposes.

Two commenters asked the Bureau to confirm that public agencies and government institutions are excluded from the coverage of the final rule. One commenter asked the Bureau to exclude foreign-owned entities from the final rule. A bank asked for clarification on whether a “small business” can be taxed under the owner's Social Security number (as opposed to an employer identification number) or whether people that have a “hobby” business or farm that report income under Schedule C or F within their tax returns are considered a small business.

A trade association suggested the Bureau exclude applications from trusts (which could be a single purpose trust, such as a land trust that is established only to hold specific real estate, a traditional estate planning vehicle or, though more infrequently, a business trust) from coverage under the final rule. This commenter stated that including trusts could raise difficult issues regarding who should be considered for data collection purposes (the settlors, beneficiaries, trustees or some combination thereof), what is the “net profit or loss” of the trust, as well as who is entitled to that net profit or loss. The commenter argued that such burdens would not be justified by the minimal information that would be generated with respect to reporting of lending to trusts.

One commenter argued for the inclusion of a test that would discern between independent contractors and what it called “actual” small businesses, as it believes that the credit needs and experiences of independent contractors and many small businesses can differ greatly. Another suggested the Bureau confirm that the proposed definition of “small business” excludes subsidiaries of large corporate entities.

A trade association for community banks recommended the Bureau exclude farms from the definition of “small business,” arguing that the underwriting criteria for small farm loans differ from other small business loans and that this distinction is acknowledged in several Federal laws such as CRA and HMDA. This commenter argued that the proposed originations-based coverage threshold would likely lead to many small lenders reducing their agricultural lending below the threshold, thereby limiting the access to credit for small farms, and concluded that an exemption was needed to acknowledge the uniqueness of agricultural lending.

Final Rule

For the reasons discussed herein, the Bureau is finalizing § 1002.106(a) as proposed, to define the term business as having the same meaning as the term “business concern or concern” in 13 CFR 121.105.

As noted above, 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.” This definition also provides that a business concern may take a number of different legal forms, including a trust, sole proprietorship, partnership, limited liability company, corporation, joint venture, 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. The Bureau is not providing interpretations of this SBA regulation in subpart B, as requested by some commenters, because the Bureau believes that existing SBA interpretations are responsive to commenters' request for clarification. For example, financial institutions are not required to collect and report data for not-for-profit applicants, because they are not “organized for profit” and are thus not a “business concern.” Moreover, the Bureau expects that applications from foreign businesses will fall outside the scope of the rule's data collection and reporting requirements unless they have a place of business located in the United States and they either operate primarily within the United States or they make a significant contribution to the U.S. economy through payment of taxes or use of American products, materials, or labor.

The Bureau also does not believe it would be appropriate to deviate from the term “business concern or concern” in 13 CFR 121.105 by adopting additional exclusions such as one for passive businesses. As discussed above, section 1071 defines small business as referring to the definition of small business concern in section 3 of the Small Business Act. The Bureau thus must look to this definition, and the SBA's implementing regulations, in defining both a business and a small business for purposes of this final rule. (The SBA Administrator's approval for the Bureau's alternate size standard for this rulemaking is discussed in the section-by-section analysis of § 1002.106(b) below.)

In addition, the Bureau believes that covering applications from all types of businesses in its rule (including passive businesses and non-operating entities) is important for advancing both of section 1071's statutory purposes. The Bureau is thus not adopting such exclusions requested by commenters. However, because the Bureau understands that passive businesses and non-operating entities are generally affiliated with other businesses (for example as subsidiaries of large corporate entities), and because financial institutions are permitted to consider affiliate revenue in determining whether a business is small for purposes of this rule, the Bureau anticipates that applications from most of these kinds of businesses ultimately will not be reportable since many such businesses will not be “small” businesses under the rule implementing section 1071. (See the section-by-section analysis of § 1002.106(b) for additional related discussion.)

The Bureau does not agree that trusts must be excluded, as suggested by one commenter, on the grounds that covering applications from trusts could raise difficult issues regarding who should be considered the principal owner for data collection purposes. Treatment under the final rule differs, for certain data points, based on whether the applicant's owner is a trust or whether the applicant itself is a trust. When a financial institution seeks to extend credit to a small business applicant whose ownership interests or assets are owned by a trust, the trust or trustee often needs to be the applicant for the credit. In such situations, because only individuals who are direct owners are considered principal owners under final § 1002.102(o), entities such as trusts would not be principal owners and thus the financial institution would not need to collect or report principal owners' ethnicity, race, and sex or the number of principal owners. And as outlined in new comment 102(o)–2, if the applicant for a covered credit transaction is a trust, a trustee is considered the principal owner of the trust for reporting purposes. The Bureau also notes that only a trust organized for profit would meet the definition of a “business concern” and fall within the scope of the rule. The Bureau believes that these clarifications sufficiently address the commenter's concerns and that covering different types of business structures in its final rule is important for advancing both of section 1071's statutory purposes. Thus, the Bureau is not defining business in a way that would exclude trusts from the final rule.

In response to comments asking the Bureau to confirm that public agencies and government institutions are excluded from the coverage of the final rule, the Bureau notes that an express exclusion for extensions of credit made to governments or governmental subdivisions, agencies, or instrumentalities is not necessary because such governmental entities do not constitute businesses under the final rule. Specifically, government entities are not “organized for profit” and are thus not a “business concern” under final § 1002.106(a).

With respect to the suggestion that the Bureau develop a test to identify independent contractors (and presumably exclude them), the Bureau notes that it is not requiring financial institutions to collect or report an applicant's business structure. Independent contractor arrangements can take many forms; the Bureau does not believe it would be appropriate to exclude from coverage under section 1071, for example, a business that acts as an independent contractor to another business, simply by virtue of that arrangement. Finally, the Bureau notes that the SBA has routinely treated independent contractors as business concerns and based on both of section 1071's statutory purposes, the Bureau is not convinced that it should define business in a way that would deviate from the SBA's approach and exclude independent contractors from the final rule.

In response to a commenter's request for clarification on whether a “small business” can be taxed under the owner's Social Security number (as opposed to an employer identification number) or whether people that have a “hobby” business or farm that report income under Schedule C or F within their tax returns are considered a small business, the Bureau notes that generally, tax documentation is not dispositive for the SBA's definition of a small business concern. In many instances (for example, with startup businesses), the business may not have any tax returns available or the business may be a sole proprietorship that is taxed under its owner's Social Security number. As long as the business is a “small business concern” in 15 U.S.C. 632(a) (as implemented in 13 CFR 121.101 through 121.107) and its gross annual revenue for its preceding fiscal year is $5 million or less, it is a small business under this final rule.

For reasons discussed in the section-by-section analysis of § 1002.104(a), the Bureau is not adopting a categorical exclusion for farms from the definition of “small business.” Credit used for agricultural purposes is generally covered by the broad definition of “credit” under ECOA. ECOA's definition of credit is not limited to a particular use or purpose and Regulation B expressly covers agricultural-purpose credit; ECOA does not provide an exception for agricultural credit; and it assigns enforcement authority to regulators of agricultural lending such as the Secretary of Agriculture and the Farm Credit Administration. Moreover, agricultural businesses are encompassed in section 1071's statutory definition of small business. With respect to the concerns that the Bureau's proposed originations-based threshold would likely lead to many small lenders reducing their agricultural lending below the exemption threshold, the Bureau notes that it is increasing the exemption threshold as discussed in the section-by-section analysis of § 1002.105(b) above. Moreover, the Bureau believes that covering agricultural businesses in its rule is important for advancing both of section 1071's statutory purposes, particularly given historical and/or continuing discrimination against Black farmers and the need for transparency into agricultural lending both for fair lending enforcement and business and community development. The Bureau is thus not defining small business in a way that would exclude such businesses from the final rule.

106(b) Small Business Definition

106(b)(1) 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. 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.

As set forth in section 1071, the data that financial institutions are required to collect and report to the Bureau include, among other things, the gross annual revenue of the business in its preceding fiscal year, the type and purpose of the loan, the census tract for the applicant's principal place of business, and the ethnicity, race, and sex of the principal owners of the business. 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 will provide much-needed transparency to an otherwise opaque market and help 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 minority-owned small businesses—need access to credit to smooth out business cash flows 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 remain very limited, particularly with respect to applicants' protected demographic information at the core of section 1071. The Bureau believes that its rulemaking implementing section 1071 of the Dodd-Frank Act will provide critical data for financial institutions, community groups, policy makers, and small businesses.

SBA size standards. The Small Business Act permits the SBA 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.

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 1,012 6-digit NAICS codes. Specifically, the SBA typically uses two primary measures of business size for size standards purposes: (i) average annual receipts 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 the 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, the SBA is required to review all size standards no less frequently than once every five years. The SBA's lowest size standards based on average annual receipts are currently used for agricultural industries. At the time of the Bureau's NPRM, the SBA used a $1 million average annual receipts standard for 46 out of 64 agricultural industries.

The SBA has since maintained or increased its size standards across all industries. Following the SBA's implementation of revised size standards in May and June 2022 and its inflation adjustment of monetary-based industry size standards in November 2022, a $1 million standard is no longer used for any industry. The size standards for agricultural industries now range from $2.25 million to $34 million, and the size standards for non-agricultural industries now range from $8 million to $47 million. In April 2022, the SBA also proposed increasing 150 size standards for businesses in manufacturing and other sectors (excluding wholesale trade and retail trade) that are based on the number of employees. The SBA also increased size standards for 57 industries in the wholesale trade and retail trade sectors.

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 absent approval by the SBA Administrator. 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. The Bureau met this requirement and also provided a copy of the published NPRM to the Division Chief for the Office of Size Standards. The Bureau subsequently obtained approval from the SBA Administrator for its alternate small business size standard contained in this final rule.

Market considerations. A wide variety of financial institutions, with varying levels of sophistication and experience, extend credit to small businesses. This rulemaking applies to a broad 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 to an organizational grouping 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 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 Bureau understands that a common demarcation for small/retail customers are those with less than $5 million, or sometimes 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 they “had gross revenues of $1 million or less in [their] preceding fiscal year.” 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. 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 this final rule. Financial institutions generally cannot inquire about an applicant's protected demographic information (including the ethnicity, race, and sex of an applicant's principal owners) without being legally required to do so. As discussed in the Overview of this part V, this final rule will only require (and thus only permit) such inquiries for small business applicants. While the Bureau is allowing 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 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.

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 request for information, 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 this rule with limited benefit.

Likewise, during the SBREFA process, small entity representatives generally preferred a simple small business definition and expressed concern regarding the complexity of the SBA's NAICS-based size standards. Some small entity representatives supported an approach for defining a small business that would use an applicant's gross annual revenue for determining whether it was “small” (thresholds under consideration at SBREFA were $1 million and $5 million). For most small entity representatives, nearly all their small business customers had less than $5 million in gross annual revenue; most were under $1 million. Several small entity representatives 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 small entity representatives said that a $5 million gross annual revenue threshold would be acceptable. Some small entity representatives advocated for higher revenue thresholds, such as $8 million or $10 million. Some small entity representatives supported a more complex approach that would distinguish between applicants in manufacturing and wholesale industries (500 employees) and all other industries ($8 million in gross annual revenue). One small entity representative also supported another approach, which was closest to the SBA's existing size standards, stating that it reflects the SBA's substantially different definitions of a small business across different industries. Feedback from stakeholders other than small entity representatives also reflected broad support for the Bureau pursuing a simplified version of the SBA small business definition.

Proposed Rule

Proposed § 1002.106(b) would have defined 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. Proposed § 1002.106(b) would have further stated 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 its gross annual revenue, as defined in proposed § 1002.107(a)(14), for its preceding fiscal year is $5 million or less. The Bureau's proposal noted it was seeking SBA approval for this alternate small business size standard pursuant to the Small Business Act.

Proposed comments 106(b)–1 and 106(b)–2 would have clarified the obligations of covered financial institutions when new information changed the determination of whether an applicant is a small business, giving rise to requirements under proposed subpart B and/or prohibitions under existing Regulation B. The Bureau acknowledged that a financial institution's understanding of an applicant's gross annual revenue may change as the application proceeds through underwriting.

Proposed comment 106(b)–3 would have explained 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 proposed § 1002.106(b).

The Bureau sought 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 sought 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 sought 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 section 1071.

Similarly, the Bureau sought comment on whether a threshold based on $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 sought 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 sought comment on defining 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 sought comment on how the proposed size standard would fit in with a financial institution's current lending or organization practices. The Bureau sought comment on whether the proposed size standard would introduce additional difficulties or challenges for SBA lenders.

Comments Received

The Bureau received many comments supporting the use of a simple gross annual revenue threshold from a range of lenders and trade associations, along with a community group, a technology service provider, a business advocacy group, several members of Congress, and others. Many commenters said that a gross annual revenue threshold was simple, objective, relatively easy to apply at the time of application, and/or will make compliance easier. One bank more generally emphasized the need for a simplified definition of small business that is easily determinable at the time of application. Another commenter noted that determining the appropriate NAICS codes and the number of employees is not easy early on in the application process. A bank stated that revenue thresholds provide a consistent and transparent line of delineation. Some commenters asserted that a gross annual revenue threshold was preferable to the SBA's more complex size standards that change over time. One commenter asserted that a gross annual revenue threshold was the only feasible way to implement section 1071 and that trying to apply SBA size standards would massively complicate the data collection process, lead to the introduction of errors that would undermine data accuracy and interfere with financial institutions' ability to extend credit to business applicants in a prompt and efficient manner. One agricultural lender argued that having to determine whether a business is small for the purposes of the rule could delay communicating a credit decision in violation of ECOA and the Farm Credit Act, while another commenter hypothesized that financial institutions may decline loan requests due to inadequate financial documentation for a small business determination. Another commenter expressed general support for a broad definition of small business.

Despite the broad support for a gross annual revenue threshold, commenters disagreed on where to set the threshold. Some commenters supported the proposed threshold of $5 million or less in gross annual revenue. A trade association stated that the proposed approach was sufficiently broad and could encompass as great a portion of the population of minority- and women-owned businesses as practical. One agricultural lender asked for additional context and insight for the $5 million threshold and an explanation regarding how a number larger than $1 million, which the Bureau had previously considered during the SBREFA process, meets the intent of Congress under section 1071. A bank advocated for a $250,000 gross annual revenue threshold, asserting that most businesses that surpass this threshold have access to or already utilize an attorney or accountant, either one of which should be able to adequately advise on the presence of any discriminatory terms.

The Bureau received some comments expressing general disapproval of its proposed approach to the gross annual revenue threshold. A few banks argued that a $5 million threshold is too high, with one adding that this was particularly true in community bank areas and another suggesting that the Bureau did not adequately support its proposal with statistics. A few industry commenters asserted that an expansive small business definition would burden their organizations with significant costs and that the Bureau should instead reduce the number of businesses that are reportable under the regulation. A women's business advocacy group suggested the Bureau have “multiple levels” in its small business definition. Several commenters noted a preference for a gross annual revenue threshold lower than $5 million, without specifying an amount. A credit union suggested the Bureau ensure that both annual revenue and asset size be taken into consideration.

Most commenters that suggested an alternative small business definition expressed preference for a $1 million gross annual revenue threshold. Some industry commenters asserted that a $1 million threshold would be less burdensome, less costly, and/or would simplify compliance as compared to the proposed $5 million threshold. One said that anything other than a $1 million threshold may be too complex for applicants and/or financial institutions, which could lead to less than expected levels of data integrity and misalignment with the 1071 statutory purposes. Several industry commenters and a business advocacy group argued that a gross annual revenue threshold of $1 million or less is more in line with congressional intent and purpose. A bank asserted that it would be more feasible to implement a firewall between underwriter and customer because a $1 million threshold would avoid a complete change in how the bank underwrites and processes small business loan applications.

Some commenters said that a $1 million threshold would better align with existing Regulation B adverse action notification requirements, with one adding that misalignment leads to compliance costs. A bank suggested the Bureau amend the existing Regulation B requirements on adverse actions to ensure consistency with this rule and avoid confusion with loan officers and loan processers.

Many more commenters advocated for alignment with CRA regulations that use $1 million or less in annual revenue to define a small business, with some arguing that misalignment with the CRA would lead to increased compliance costs. Some industry commenters stressed the need for consistency between reporting regimes, asserting that the proposed threshold did not align with other regulatory requirements such as CRA. One commenter suggested that inconsistency with CRA would add another nuance to data validation. A State bankers association suggested that a $1 million threshold would also better align with Small Business Development Center and Small Business Investment Company program guidelines. A credit union trade association suggested that a $1 million gross annual revenue threshold would be consistent with the SBA's definitions for some types of small businesses, including most agricultural small businesses.

Some commenters said that a $1 million threshold would cover most (over 95 percent) of small businesses as defined by the SBA size standards in effect at the time of the NPRM. Similarly, many commenters argued that the proposed $5 million threshold would be overinclusive and a $1 million threshold would better exclude non-small businesses. One bank said this overinclusiveness would be particularly notable in middle/rural America, while another argued that the proposed definition would create inequity and inflated costs for banks serving small-to-midsize markets by picking up a disproportionate number of businesses as small businesses under the rule.

Two credit union trade associations argued that the proposed $5 million threshold would increase the size of the 1071 data collection, the risk to data privacy, and the costs associated with compliance for covered financial institutions. Two other commenters suggested that a $1 million threshold would accomplish the goals of section 1071 without unnecessary drawbacks.

In contrast, some commenters requested a more expansive size standard for defining small businesses under the rule. A number of community groups expressed a preference for a $7.5 million threshold, citing language from the SBA's website indicating that most non-manufacturing businesses with average annual receipts under $7.5 million will qualify as a small business. A few other commenters expressed a preference for a $8 million threshold. A CDFI lender maintained that a $8 million threshold was the most common SBA size standard threshold for average annual receipts, would cover more manufacturing and wholesale businesses, and received broad support from small entity representatives (though they recommended eliminating the 500 employees standard for manufacturing and wholesale that was part of that option under consideration at SBREFA). Another commenter opined that a threshold of $8 million (adjusted every five years according to the SBA's recalibrations) would better cover the small business market, account for differences in business types (such as manufacturing) and regional economic conditions, and would more closely align with what lenders already consider small businesses. Finally, a joint letter from community groups, community oriented lenders, and business advocacy groups asserted that a threshold lower than $8 million would lead to significantly less data against which to compare lending patterns and to identify lending trends and gaps.

Existing SBA size standards. Several commenters recommended the Bureau use the SBA's definition and size standards. One credit union trade association asserted that the SBA definition is already used by credit unions and all financial services providers as the industry standard and thus using an alternative definition would only create confusion and inconsistent Federal regulations, thereby harming credit unions' ability to serve their members. A bank argued that having different definitions and requirements across similar regulatory obligations would result in more burden and costs due to the unique review and maintenance of each obligation.

Loan size. Some industry commenters suggested defining a small business by the credit amount requested. Several said that small businesses should be defined by loans of $1 million or less. A bank asserted that this would be a much more reasonable definition of what a small business is and will encompass the majority of its commercial lending to small businesses. A few commenters argued that this would better align with CRA and call report requirements. Another commenter noted that loan size does not fluctuate over time like revenue and it is easy to identify at the beginning of the application process. Some credit union commenters suggested requiring reporting for small business loans up to $10 million. A few other industry commenters suggested adopting a maximum amount applied for “exclusion” of $750,000 in order to exempt applications from non-small businesses. These commenters asserted that such an exclusion would harmonize this rule with the SBA's maximum direct loan amount. A few commenters expressed disapproval of a $1 million loan size threshold, noting many small businesses borrow amounts far more than $1 million while many large businesses borrow amounts far below that threshold.

Small farm definition. The Bureau received comments from many agricultural lenders suggesting that the $5 million gross annual revenue threshold would be overinclusive when applied to farms and that agricultural lending needs a different small business definition for purposes of section 1071 in order to capture only truly small farms. One commenter asserted that under the Small Business Act's implementing regulations, the Bureau must take into account differing industry characteristics. Specifically, many agricultural lenders suggested that the Bureau's definition of “small business” align with the Farm Credit Administration's (FCA) definition of “small farmer,” which is a “farmer, rancher, or producer or harvester of aquatic products who normally generates less than $250,000 in annual gross sales of agricultural or aquatic products.” A few also urged the Bureau not to ignore the USDA small farm definitions. One commenter noted that even a $1 million threshold would be too high because 96 percent of farms had less than $1 million in annual sales of agricultural products. Several commenters suggested that the FCA definition would facilitate compliance because staff and compliance professionals at Farm Credit lenders are already very familiar with that standard and because it would be confusing and burdensome for staff to manage two competing regulatory definitions of “small” customers.

Several commenters noted that approximately half of Farm Credit System loans outstanding were to “small farmers” and that this level of coverage would more than accomplish section 1071's statutory purposes. One agricultural lender noted that over 76 percent of its loan volume portfolio would fall within the proposed $5 million “small business” definition (approximately 3,770 loans) but 10.7 percent of the loan volume portfolio falls under the FCA definition (approximately 2,730 loans).

Other suggested size standards. A trade association representing online lenders recommended the Bureau adopt an easy-to-administer definition based on 4-digit NAICS codes. This commenter argued that while a singular revenue or number of employees standard to designate small businesses might be simpler for the Bureau, it would not be a true reflection of the small business market. The commenter asserted that employing the first 4 digits of the NAICS codes would provide measurements that differentiates broadly by industry, but provides a standard that gives lenders flexibility, allowing them to use data supplied by the borrower without having to undertake a costly and time-consuming verification process of the data provided.

Many community groups, community-oriented lenders, and a minority business advocacy group urged the Bureau to adopt the 500 employee/$8 million test set forth in the SBREFA Outline. A few of these commenters said this was an easily implemented definition that covered the bulk of small businesses as defined by the SBA without the complexities of the SBA's NAICS-code based definitions, whereas the Bureau's proposal would exclude 270,000 businesses that the SBA classifies as small businesses, with many such businesses disproportionately located within retail trade and construction industries, where small businesses are more likely to be owned by people of color.

One comment letter suggested defining a small business as having a gross annual revenue of $1 million and including a threshold for the number of employees required for a business to be deemed small. They referenced the SBA's size standards, which use a 100-employee threshold for some industries, but suggested the Bureau use a similar definition or alter its small business definition to include more minority- and women-owned small businesses.

Other issues. A few comments addressed the role of affiliate revenue in business size determinations. A bank suggested aligning treatment of affiliate revenue with current CRA requirements to avoid reporting disparities from institution to institution for similarly situated applicants. Pointing to SBA rules and guidance, two other industry commenters asserted that subsidiaries of large companies should be excluded from the definition of “small business” if the aggregate revenues for all affiliates, as defined in 13 CFR 121.103, exceed the gross annual revenue threshold.

Two commenters asked for clarification related to business size determinations involving multiple applicants. One suggested the Bureau clarify that loans jointly made to multiple borrowers are not reportable where one or more of the borrowers may qualify as a small business under the rule but is not the primary business seeking the funding. Another commenter suggested the Bureau (i) allow lenders to treat all co-borrowers as one applicant such that the gross annual revenue of all co-borrowers would be aggregated for purposes of assessing whether the loan is a small business loan and (ii) clarify how to identify loans to a “minority-owned business” or a “women-owned business” when one, but not all, co-borrowers meet the definitions of these terms.

A group of insurance premium finance trade associations noted that their members do not obtain any financial information or information about for-profit status regarding any applicant and suggested the Bureau permit their members to ask the insured business if it is a small business (after furnishing the regulation's operative definition) when the signed premium finance agreement is submitted to the lender or immediately after the lender receives the signed premium finance agreement.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.106(b)(1) (proposed as § 1002.106(b)) 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. As discussed above, 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. Final § 1002.106(b)(1) further states that, notwithstanding the size standards set forth in 13 CFR 121.201, for purposes of subpart B, a business is a small business if its gross annual revenue, as defined in final § 1002.107(a)(14), for its preceding fiscal year is $5 million or less. The Bureau believes this 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 across industries. The Bureau has obtained SBA approval for this alternate small business size standard pursuant to the Small Business Act.

The Bureau believes that adopting this gross annual revenue standard 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 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 adopting suggested alternative standards, including, but not limited to a $1 million gross annual revenue standard, a $7.5 or $8 million gross annual revenue standard, a threshold based on loan size, a different standard for agricultural lending, nor the existing SBA size standards.

The Bureau agrees with the many commenters who said that a definition of small business for purposes of section 1071 based on a gross annual revenue threshold was simple, objective, relatively easy to apply at the time of application, and/or will make compliance easier. The Bureau understands that a majority of large banks already use gross annual revenue thresholds to delineate small business lending within their own institutions. The Bureau also agrees that a gross annual revenue threshold is the preferred way to implement section 1071 to avoid overly complicating the data collection process, leading to the introduction of errors that would undermine data accuracy, or interfering with financial institutions' ability to extend credit to business applicants in a prompt and efficient manner. The Bureau believes that a simplified definition of small business that does not require determining the appropriate NAICS codes and/or the number of employees will satisfy lenders' needs to easily determine small business status early in the application process and avoid delays in communicating a credit decision.

While the Bureau received broad support for a simple gross annual revenue threshold generally, it received narrower support for a threshold of $5 million or less in gross annual revenue. The Bureau believes that a $5 million threshold strikes the right balance in terms of broadly covering the small business financing market to fulfill section 1071's statutory purposes while meeting the SBA's criteria for an alternative size standard. As described above, the SBA is generally increasing size standards across industries and no longer uses a $1 million annual receipts standard for any industry. As a result, the Bureau's $5 million standard is sufficiently inclusive relative to the SBA size standards. Moreover, while there is no clear consensus on a simplified size standard that uniformly covers all small business financing markets, the Bureau understands that among the banks that already use a gross annual revenue threshold to delineate small business lending, the majority of banks of all sizes use a threshold above $1 million in firm gross annual revenue. In fact, larger banks typically use even higher thresholds (for banks with less than $1 billion in assets, 25.1 percent use a threshold greater than $5 million in firm gross annual revenue, while 37.0 percent of banks with $1 billion to $10 billion in assets use a gross annual revenue threshold of $5 million or more).

The Bureau has considered the potential effect of applying a $5 million gross annual revenue threshold to both non-agricultural and agricultural industries and compared that standard to coverage under the SBA's existing size standards. Among non-agricultural industries, the Bureau estimates that over 1.5 million (27 percent) small businesses would not be covered by an alternative $1 million gross annual revenue threshold and at a $2 million threshold, the rule would have been underinclusive by 12 percent. (This and other size standards suggested by commenters are discussed in detail under Alternatives Considered below.) At a $8 million threshold, the percentage of underinclusivity falls to approximately 4 percent, or approximately 235,000 non-agricultural businesses.

Applying an $8 million threshold to agricultural businesses, the Bureau's analysis shows that over 20,000 such businesses that are not considered small under the SBA's size standards would have their applications reported to the Bureau. With the finalized $5 million gross annual revenue threshold, relative to current SBA size standards, all small farms' applications will be reported to the Bureau, along with applications from 14,000 agricultural businesses that are not considered small under the SBA's size standards. Thus, the Bureau believes that its $5 million gross annual revenue threshold strikes an appropriate balance between covering the applications of most businesses that are considered small under the SBA's size standards, while minimizing the number of businesses above the SBA's size standards whose applications will be reported to the Bureau, and in a way that satisfies the SBA's criteria for approving an alternative size standard under its regulations.

The Bureau also notes that in their proposal to amend their regulations implementing the CRA, the Board, FDIC, and OCC proposed to define the terms “small business” and “small farm” consistent with the Bureau's definitions in its NPRM. Thus, per the CRA proposal, once 1071 data are available, the agencies would transition from the current CRA definitions of small business and small farm loans to definitions that cover loans to small businesses and small farms with gross annual revenues of $5 million or less. Given the many comments that the Bureau received advocating for CRA alignment, the Bureau strongly supports the CRA agencies' efforts and believes that finalizing its proposed small business definition will streamline reporting and minimize compliance risks for financial institutions that are also reporting covered credit transactions under CRA and would simplify data analysis for CRA-reportable transactions. See part II.F.2.i above for further discussion of the CRA and its relationship to this rule.

With respect to a commenter's suggestion that the Bureau increase the existing Regulation B threshold for notification to business credit applicants for consistency with this rule, the Bureau does not believe such a change would be appropriate at this time. Given the fact that these notification requirements have been in place for close to 50 years and financial institutions have invested in compliance infrastructure around these requirements, the Bureau believes that the notification threshold in existing Regulation B should not be amended without additional research and input from stakeholders.

To address ECOA and existing Regulation B's general prohibition against inquiring about protected demographic information in connection with a credit transaction, and to clarify the obligations of covered financial institutions under subpart B, the Bureau is adopting final comments 106(b)(1)–1 and 106(b)(1)–2 to address situations when new information may arise that could change the determination of whether an applicant is a small business. The Bureau acknowledges that a financial institution's understanding of an applicant's gross annual revenue may change as the institution proceeds through underwriting. The Bureau is finalizing comment 106(b)(1)–1 (proposed as 106(b)–1) with updated cross-references to other portions of the final rule. Final comment 106(b)(1)–1 explains that if a financial institution initially determines an applicant is a small business as defined in final § 1002.106(b) based on available information and obtains data required by final § 1002.107(a)(18) and (19), 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 Regulation B if it meets the requirements of final § 1002.112(c)(4). The Bureau is finalizing comment 106(b)(1)–2 (proposed as 106(b)–2) with certain revisions for additional clarity. Final comment 106(b)(1)–2 explains that if a financial institution initially determines that the applicant is not a small business as defined in final § 1002.106, but then later concludes the applicant is a small business prior to taking final action on the application, the financial institution must report the covered application pursuant to final § 1002.109. In this situation, the financial institution shall endeavor to compile, maintain, and report the data required under final § 1002.107(a) in a manner that is reasonable under the circumstances.

The Bureau is finalizing comment 106(b)(1)–3 (proposed as comment 106(b)–3) to explain that a financial institution is permitted to 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 final § 1002.106(b)(1). The comment further clarifies that, if the applicant provides updated gross annual revenue information or the financial institution verifies such information, the financial institution must use the updated or verified information in determining small business status. The Bureau has changed the heading of this comment and has removed some of the introductory language to this comment for clarity as suggested by several commenters; this change is not intended to alter the meaning of this comment.

The Bureau has considered comments regarding the role of affiliate revenue in business size determinations. The Bureau agrees that subsidiaries of large companies should be excluded from the definition of “small business” provided that the aggregate revenues for all affiliates, as defined in 13 CFR 121.103, exceed the $5 million gross annual revenue threshold—and, indeed, this is consistent with what the Bureau proposed. The Bureau is not, however, adopting the mandate in the SBA regulations, which provide that the average annual receipts size of a business concern with affiliates must be calculated by adding the average annual receipts of the business concern with the average annual receipts of each affiliate. The Bureau understands that the SBA totals the average annual receipts of the applicant and all of its affiliates in determining size because in order to be eligible for certain Federal programs and certain Federal contracts and subcontracts, a firm must be a “small business concern.” Because the size standard used for this rule is only to determine whether data collection is required pursuant to section 1071 and has no bearing on eligibility for Federal small business assistance, the Bureau does not believe it is necessary to mandate that financial institutions consider affiliate revenue in determining an applicant's small business status.

The Bureau believes that this approach to use of affiliate revenue in size determinations will address concerns related to treatment of passive businesses and non-operating entities, such as special purpose vehicles. The Bureau understands that passive businesses and non-operating entities are generally affiliated with other businesses (for example as subsidiaries of large corporate entities). The Bureau notes that final § 1002.102(a) adopts the SBA's expansive view of what constitutes affiliation, and it is therefore unlikely that a special purpose entity or other large project financing investment entity would be formed without any affiliation with an established entity—rather, they are likely created as subsidiaries of an existing business or as joint ventures between existing businesses. Thus, financial institutions will be able to exclude businesses that are, in fact, middle- or large-sized applicants from data collection and reporting under this final rule by considering these businesses' affiliate revenues, which will likely exceed the $5 million gross annual revenue threshold for purposes of the definition of a small business. For example, if a financial institution receives an application for financing from a special purpose vehicle or shell company established for the purpose of acquiring significant commercial real estate (such as a hospital building), the financial institution could rely on information provided by the applicant regarding its, and its affiliates, gross annual revenue for purposes of determining small business status under § 1002.106(b). As discussed in greater detail below, the Bureau also believes that its approach to affiliate revenue further obviates the need to define a small business by the credit amount requested as suggested by some commenters.

The Bureau has considered the comments regarding business size determinations involving multiple unaffiliated applicants and does not agree with the suggested approach to allow financial institutions to treat all co-applicants as one applicant by aggregating their gross annual revenues for purposes of assessing business size. The Bureau does not believe that (in situations not involving affiliated entities) such an approach would be consistent with the SBA's definitions of business concern and small business concern. The Bureau is addressing commenters' requests for clarification on this issue by adding new comment 106(b)(1)–4, which provides that if a covered financial institution receives a covered application from multiple businesses who are not affiliates, as defined by final § 1002.102(a), where at least one business is a small business under final § 1002.106(b), the financial institution shall compile, maintain, and report data pursuant to final §§ 1002.107 through 1002.109 regarding the covered application for only a single applicant that is a small business. The comment clarifies that the financial institution shall not aggregate unaffiliated co-applicants' gross annual revenues for purposes of determining small business status under final § 1002.106(b) and provides a cross reference to final comment 103(a)–9 for additional details.

In response to the group of insurance premium finance trade associations that highlighted their members' challenges with determining small business status, the Bureau notes that insurance premium financing arrangements are excluded under final § 1002.104(b)(4) for the reasons set forth in the corresponding section-by-section analysis.

Alternatives Considered

Gross annual revenue of $1 million. In the NPRM, the Bureau did not propose a $1 million gross annual revenue threshold, expressing concern that such a threshold 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. Nevertheless, as discussed above, many commenters requested the Bureau adopt a $1 million gross annual revenue threshold.

The SBA no longer uses a $1 million annual receipts standard for any industry and the Bureau does not believe that a gross annual revenue threshold of $1 million would be more in line with congressional intent and purpose. Congress did not specify a gross annual revenue threshold for defining a small business under section 1071 but instead pointed to the SBA's definition of small business concern. However, Congress set forth a process to allow the Bureau to prescribe an alternative size standard, if approved by the SBA Administrator. Given the fact that the SBA no longer uses a $1 million standard for any industry and is thus unlikely to approve an alternative size standard at that threshold for all industries, the Bureau believes that its small business definition is a more appropriate alternative size standard.

While it is true that a $1 million threshold would better align with existing Regulation B adverse action notification requirements, the Bureau believes that the flexibilities built into the final rule for small business size determinations will obviate the need for changes to adverse action operations, including compliance with existing Regulation B adverse action notification requirements. The Bureau also notes that the concerns raised by many commenters regarding alignment with CRA regulations would likely be resolved if the CRA proposal, which expressly seeks alignment with the Bureau's alternative small business definition, is finalized. With respect to suggested alignment with Small Business Development Center and Small Business Investment Company program guidelines, the Bureau points to the fact that credit transactions made under programs with lower thresholds are by default small business transactions for the purposes of the final rule and thus not inconsistent.

The Bureau has considered the comments arguing that a $5 million threshold would be overinclusive and a $1 million threshold would better exclude non-small businesses. Based on the Bureau's analysis, neither a $1 million threshold nor $5 million threshold would be overinclusive among non-agricultural industries relative to the SBA's current size standards. On the other hand, the Bureau estimates that, in terms of the number of SBA “small” firms whose applications would not be reported to the Bureau, a $1 million threshold would be 4.5 times more underinclusive than a $5 million threshold. Moreover, research conducted by FDIC staff found that among banks with $1 billion to $10 billion in assets, more than one-third of self-described small business lending would be excluded under the $1 million gross annual revenue definition and that among banks with more than $10 billion in assets, nearly two-thirds would be excluded. Based on this study, FDIC staff concluded that “for the typical bank, a [gross annual revenue] threshold of $1 million is overly conservative and would exclude many firms that should properly be considered small businesses.” The Bureau agrees with this conclusion, and likewise believes that a $1 million gross annual revenue threshold 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.

Gross annual revenue of $7.5 to $8 million. The Bureau is not adopting a $7.5 million or $8 million gross annual revenue threshold, as suggested by a number of commenters. While the Bureau agrees that a threshold of $7.5 to 8 million would more expansively cover SBA small businesses (the Bureau estimates that under a $8 million threshold, applications from approximately 130,000 more SBA “small” firms would be reported to the Bureau as compared to a $5 million threshold), the Bureau does not believe that this definition more closely aligns with what lenders already consider small businesses based on comments received in support of a lower than $5 million threshold. Moreover, the Bureau notes that while an $8 million threshold would be less underinclusive among non-agricultural industries relative to SBA size standards, it would be more overinclusive among agricultural businesses.

Loan size. The Bureau does not believe that it would be appropriate to define a small business based on the size of the loan applied for ( i.e., by adopting a maximum “amount applied for” exclusion) such as one in the amount of $750,000 (for SBA alignment) or $1 million (for CRA alignment), as suggested by some commenters. The Bureau likewise is not defining a small business based on whether a loan is for an amount up to $10 million, as suggested by some commenters, or any other size. As explained in the NPRM, the Bureau believes that such potential definitions do not bear a sufficient relationship to the size of the business or its operations. For instance, under a definition similar to existing CRA requirements, 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 likewise agrees with commenters cautioning against using the CRA definition based on loan size, because many small businesses borrow amounts far more than $1 million while many large businesses borrow amounts far below that threshold.

Existing SBA size standards. Despite some recommendations that the Bureau use the SBA's definition and size standards, the Bureau believes the SBA's size standards are not suitable for this data collection initiative and prefers to establish a small business definition specifically tailored to this rulemaking implementing section 1071.

A simple, easy-to-implement small business definition is necessary in light of the general prohibition in existing Regulation B against creditors' inquiring about 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. ECOA section 704B(e)(2)(G), as implemented by this rule, requires a financial institution to collect and report the ethnicity, race, and sex of the principal owners of the business. 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 6-digit NAICS code for the business and then apply the NAICS-based size standards to determine whether an applicant for business credit is a small business.

As discussed above, commenters expressed concern to the Bureau about the difficulties in determining the appropriate 6-digit NAICS code for businesses and in applying the SBA's 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 code-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 commenters 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 small business credit applicants 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.

Notwithstanding its decision to not rely on NAICS codes in its small business definition, 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. As discussed in the section-by-section analysis of § 1002.107(a)(15) below, the Bureau is therefore requiring financial institutions to collect and report 3-digit NAICS sector codes for applications subject to this final rule. 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, differs in kind from requiring NAICS information as a necessary step to beginning an application (and correctly determining which type of application to initiate). In addition, the NAICS information now required by the final rule is a 3-digit NAICS code instead of a 6-digit code as proposed; this information will provide valuable data to analyze fair lending patterns and identify business subsectors with unmet credit needs, while limiting the burden this collection may impose on financial institutions and small business applicants.

The Bureau also believes that its simplified alternative size standard will provide reporting results that are largely consistent with what would be reported by 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 various alternative approaches would change the number of businesses considered “small” under this rule relative to the SBA definition. Among the 7.2 million small employer businesses and farms, the Bureau estimates that 365,000 businesses that would be small under the SBA's existing size standards will not be covered by the Bureau's $5 million gross revenue standard. The Bureau further estimates that the Bureau's rule will cover some 14,000 agricultural businesses that would not be small under the SBA's existing 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 some industries will have greater divergence between which businesses are small under the Bureau's $5 million gross annual revenue alternative size standard and which businesses are small under the SBA's existing size standards. That is, applications for businesses that are small under the SBA's existing size standards will be reported to the Bureau less from some industries than others. In general, there will be a larger proportion of businesses whose applications will 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 disproportionately affected may include manufacturing, wholesale trade, health care and social assistance, and professional, scientific, and technical services. The Bureau received limited public feedback with respect to such concerns.

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 this final rule. As discussed in the section-by-section analysis of § 1002.105(b), small business lending data collection and reporting is required only for financial institutions that originated at least 100 covered credit transactions for small businesses in each of the two preceding calendar years. Financial institutions that do not frequently lend to small businesses will seek to track precisely how many such transactions they have originated. The Bureau believes that it is important to empower financial institutions to quickly ascertain whether a covered credit transaction was originated for a small business, so that infrequent lenders can continue to monitor whether compliance with this final rule is required.

The Bureau believes that its $5 million gross annual revenue standard 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 1,012 6-digit NAICS codes. The SBA typically uses two primary measures of business size for size standards purposes: (i) average annual receipts for businesses in services, retail trade, agricultural, and construction industries, and (ii) average number of employees for businesses in all manufacturing industries, most mining and utilities industries, and some transportation, information, and research and development industries. The Bureau understands that 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 the 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 its $5 million size standard will only be used to determine whether small business lending data collection is required pursuant to section 1071, and has 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 adverse action notice requirements apply —than offer the closest metric currently in use by SBA regulations, which is generally average annual receipts across the previous five fiscal years.

The Bureau believes that requiring application of existing SBA size standards for this rule could result in many financial institutions having to undergo extensive 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. This delay could make it more difficult for financial institutions to collect applicants' protected demographic information (particularly for applications that are withdrawn or closed for incompleteness early in the application process), which is important to both of section 1071's statutory purposes. 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 expeditiously determine whether this 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 collection of protected demographic information pursuant to section 1071. The Bureau believes, and most commenters agreed, that this rule will 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 recent turnover rate of over 20 percent. The Bureau also believes that a gross annual revenue reporting trigger will facilitate better compliance with section 1071 requirements because it aligns with many larger financial institutions' current lending and organizational practices, which use gross annual revenue to assign small businesses into their retail/small business banking groups.

Requiring financial institutions to rely on the SBA's existing size standards for purposes of 1071 data collection and reporting requirements could 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 SBA's existing size standards, at the beginning of the application process, could slow down the application process, particularly at institutions that otherwise would often be able to render credit decisions in a matter of minutes; the Bureau believes that financial institutions may be compelled to raise the cost of credit or originate fewer covered credit transactions as a result. Such an outcome could needlessly affect access to credit for small businesses. The Bureau believes that eliminating credit opportunities or reducing access to credit for small businesses, including women-owned and minority-owned small businesses, in this way would frustrate 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.”

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 this rule. 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, this rule requires it 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 necessitates determining the correct NAICS code for the applicant, and in many cases, requesting five years of average annual receipts or the 24-month average number of employees from the applicant pursuant to SBA's existing size standards, the Bureau believes that businesses seeking credit would encounter, at a minimum, otherwise avoidable delays in application processing.

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 § 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.” 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 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 standard for implementing section 1071 could be sufficient. Requiring financial institutions to apply different standards could be unnecessarily confusing and burdensome, as well as also increase the potential for errors in data collection and reporting. Moreover, as discussed below, section 1071 amends ECOA, which already incorporates the concept of gross annual revenue as implemented under existing Regulation B's adverse action notice requirements.

Small farm definition. The Bureau is not adopting a different small business definition for farms. Many agricultural lenders suggested aligning with the Farm Credit Administration's (FCA) small farmer definition for agricultural financing transactions, primarily arguing that: (i) the proposed $5 million threshold is substantially overinclusive as applied to the farming community and would cover almost all the customers of FCS lenders; (ii) aligning with the FCA's “small farmer” definition would facilitate compliance and reduce burden because FCS lenders are very familiar with the standard; and (iii) this change would take into account the unique nature of the agricultural industry, which is disproportionately dominated by family farms.

The Farm Credit Act of 1971 authorizes the FCS to provide financing and services to farmers and ranchers through FCS banks and associations. The Act also provides the FCA, an independent Federal agency, authority to regulate and examine these institutions and it requires them to report annually to FCA about the operations and achievements of the associations' lending and service programs for young, beginning, and small farmers and ranchers. FCA's definition of “small farmer” is “a farmer, rancher, or producer or harvester of aquatic products who normally generates less than $250,000 in annual gross sales of agricultural or aquatic products.” The FCA has not updated this threshold since it was first adopted in 1998 although it has since considered whether to change it.

The NPRM made clear the Bureau's intention to cover agricultural credit, and the Bureau did not propose a separate small farm definition or any other adjustments specifically for agricultural credit. Prior to the SBA increasing its size standards for small farms, the Bureau acknowledged in the NPRM that its proposed $5 million size standard could result in data reporting on applications from approximately 77,000 businesses that would not be considered small under the SBA size standards in effect at that time, the vast majority of which would be farms (for which, at that time, the SBA predominantly used a $1 million standard). Conversely, the Bureau estimated that 270,000 primarily non-agricultural businesses that would be small under the SBA's size standards in effect at the time of the NPRM would not be covered under the proposed $5 million gross annual revenue standard.

As noted above, the SBA's size standards for agricultural industries have increased since the NPRM and now range from $2.25 million to $34 million average annual receipts—which now means that the $5 million gross annual revenue standard the Bureau is finalizing is markedly more aligned with SBA's size standards for farms than it was at the time of the NPRM. The Bureau believes that these recent changes to the SBA size standards, which were based on extensive research and a notice and comment rulemaking, further suggest that a definition of small farms based on $250,000 in annual gross sales, preferred by certain commenters, would not sufficiently cover small agricultural businesses.

The Bureau does not believe that the Small Business Act requires the Bureau to adopt a separate definition for small farms, as implied by one commenter. The Small Business Act provides that the SBA Administrator must “ensure that the size standard varies from industry to industry to the extent necessary to reflect the differing characteristics of the various industries and consider other factors deemed to be relevant by the Administrator.” The Bureau believes, and explained to the SBA when obtaining its approval, that this rule will benefit from a universal, easy-to-apply reporting trigger that reflects the need for a wide variety of financial institutions to apply a simple, broad definition of a small business that is practical across the many product types, application types, technology platforms, and applicants in the market. In particular, the Bureau believes that the size standard finalized here is consistent with factors that the SBA has previously identified as relevant to the proper exercise of its discretion in this respect—the SBA considers (1) current economic conditions, (2) its mission and program objectives, (3) the SBA's current policies, (4) impacts on small businesses under current and proposed or revised size standards, (5) suggestions from industry groups and Federal agencies, and public comments on the proposed rule, and (6) whether a size standard based on industry and other relevant data successfully excludes businesses that are dominant in the industry.

While the Bureau received widespread support for a simple gross annual revenue threshold, it also understands, as explained by some commenters, that many agricultural lenders generally do not collect gross annual revenue for underwriting or regulatory compliance purposes, which could complicate use of a gross annual revenue threshold to determine small business status. Nonetheless, ECOA section 704B(e)(2)(F) requires financial institutions to collect and report gross annual revenue under section 1071. As discussed in its section-by-section analysis of § 1002.107(a)(14), the Bureau is finalizing comment 107(a)(14)–2, which first clarifies that pursuant to final § 1002.107(c), a financial institution shall maintain procedures reasonably designed to collect applicant-provided data, including the gross annual revenue of the applicant. The final comment then states 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 for agricultural lenders and other financial institutions will 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.

While the Bureau acknowledges arguments that the FCA definition might facilitate compliance among FCS lender staff and other compliance professionals who are already familiar with that definition, the Bureau does not believe it would be appropriate to deviate from its otherwise widely supported cross-industry approach. While the Bureau acknowledges that the market share of total farm business debt held by FCS lenders is significant (44.4 percent at the end of 2020 ), the Bureau is mindful that many other types of non-FCS lenders participate in this important small business lending market. Such lenders would not be able to leverage familiarity with the existing FCA definition and may engage in other types of non-farm lending that would not be subject to this definition. As a result, these lenders may not equally benefit from applying the FCA definition to agricultural small businesses. Indeed, the Bureau understands that an association of community banks issued a letter to oppose efforts to obtain special treatment for FCS lenders, stating that “[i]t would be totally inappropriate to exempt FCS lenders from onerous regulatory burdens while subjecting smaller lenders, such as community banks, to those regulations even as both types of lenders are serving the same customer base in many instances.” The Bureau believes a consistent small business definition that applies to all financial institutions will result in consistency across the 1071 data, more robust fair lending analyses, and arguably an even playing field for compliance across all financial institutions.

The Bureau acknowledges that a $5 million gross annual revenue threshold will be somewhat overinclusive relative to SBA and Census of Agriculture standards. Some agricultural lenders lament that the threshold would cover almost all their lending and several commenters argued in favor of the FCA definition instead for section 1071 purposes because, they said, it would capture a substantial amount of data while mitigating some of the impact of the compliance cost. As discussed above, the Bureau believes that its $5 million gross annual revenue threshold strikes an appropriate balance between covering the applications of most businesses that are considered small under the SBA's size standards, while minimizing the number of businesses above the SBA's size standards whose applications will be reported to the Bureau, and in a way that satisfies the SBA's criteria for approving an alternative size standard under its regulations. In striking this balance, the Bureau considered section 1071's statutory purposes, and it believes that a broader scope of coverage with regard to agricultural businesses is warranted, given the historical and/or continuing discrimination against Black farmers and the need for transparency into agricultural lending both for fair lending enforcement and business and community development.

Other suggested size standards. The Bureau is not adopting a small business definition based on 4-digit NAICS codes, as suggested by one commenter. As explained above in its discussion of existing SBA size standards, the Bureau believes needing to obtain even a 4-digit NAICS code at the beginning of the application process would often result in a financial institution not being able to determine whether an applicant for business credit is small (and thus subject to the data collection requirements of this final rule) until later in the application process. Similarly, the Bureau believes that a small business definition based on both number of employees and gross annual revenues ( e.g., the 500 employee/$8 million standard set forth in the SBREFA Outline and suggested by commenters or one commenter's 100 employee/$1 million standard) would mean that a financial institution 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, only at that later stage would it be able to determine that such data collection is required. This delay could interfere with financial institutions' ability to collect these data, particularly for applications that are withdrawn or closed for incompleteness early in the application process, which would limit the usefulness of the data for section 1071's statutory purpose of fair lending enforcement.

106(b)(2) Inflation Adjustment

Inflation is a general increase in the overall price level of the goods and services in the economy; deflation marks a general decrease in the same. A price index, of which there are several types, measures changes in the price of a group of goods and services. The Board's Federal Open Market Committee currently finds that an annual increase in inflation of 2 percent in the price index for personal consumption expenditures, produced by the Department of Commerce, is most consistent over the longer run with the Board's mandate for maximum employment and price stability. The United States Bureau of Labor and Statistics, which publishes several price indices, found that from December 2020 to December 2021, “consumer prices for all items rose 7.0 percent, the largest December to December percent change since 1981.”

In order to keep pace with changes to the SBA's own size standards and the potential impact of future inflation or deflation, the Bureau stated in the NPRM that it was 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 sought comment on how this should be done and the frequency at which it should occur.

Two community groups and a CDFI lender requested that the Bureau address adjustments of its gross annual revenue threshold for defining a small business under the rule. The community groups suggested annual adjustments for inflation, while the CDFI lender suggested an adjustment every five to ten years to account for future inflation and keep pace with changes to the SBA's own size standards. Conversely, a bank argued against incremental adjustments, stating that the Bureau should set its small business definition once in the final rule. Another bank suggested that the Bureau wait to determine if the threshold needs adjusting after it has sufficient data to analyze after several years of collection.

For the reasons set forth herein, the Bureau is finalizing new § 1002.106(b)(2) to provide that every five years after January 1, 2025, the gross annual revenue threshold set forth in § 1002.106(b)(1) shall adjust based changes to the Consumer Price Index for All Urban Consumers (U.S. city average series for all items, not seasonally adjusted), as published by the United States Bureau of Labor Statistics (CPI–U). Any such adjustment will be rounded to the nearest multiple of $500,000. If an adjustment is to take effect, it will do so on January 1 of the following calendar year.

New comment 106(b)(2)–1 clarifies the Bureau's inflation adjustment methodology. The comment explains that the base for computing each adjustment (both increases and decreases) is the January 2025 CPI–U; this base value will be compared to the CPI–U value in January 2030 and every five years thereafter. The comment provides several examples illustrating this comparison. New comment 106(b)(2)–1 makes clear that if, as a result of rounding to the nearest multiple of $500,000, there is no change in the gross annual revenue threshold, there will be no adjustment.

New comment 106(b)(2)–2 provides that if publication of the CPI–U ceases, or if the CPI–U otherwise becomes unavailable or is altered in such a way as to be unusable, then the Bureau shall substitute another reliable cost of living indicator from the United States Government for the purpose of calculating adjustments pursuant to final § 1002.106(b)(2).

The Bureau agrees with several commenters that it should provide for a mechanism to update the rule's $5 million gross annual revenue size standard over time to account for the potential impact of inflation or deflation. In order to minimize operational disruptions, the Bureau is not adopting an annual adjustment for inflation; instead, a determination regarding the need to adjust the threshold will occur every five years, beginning in 2030, to account for future inflation or deflation on a schedule similar to the SBA's own size standards, which are required to be reviewed no less frequently than once every five years under the Small Business Act. Recently, the SBA added a 13.65 percent inflation increase to its receipts- and assets-based size standards. Moreover, in order to mitigate commenters' concerns discussed in the section-by-section analysis of § 1002.107(a)(14) regarding complexity and difficulty of collecting gross annual revenue information, the Bureau will round any such adjustment to the nearest multiple of $500,000. The Bureau believes that this rounding, in combination with the approach in final 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 the applicant for such information—will make it easier for financial institutions to more quickly determine small business status for the purpose of rule applicability. The Bureau also believes that this approach is consistent with existing Bureau procedures for inflation adjustments (albeit in a more streamlined way), provides transparency for replication, and will result in less-frequent changes in the reporting requirements of financial institutions, thereby reducing the disruption that an annual inflation adjustment might cause in this situation.

The Bureau is providing commentary to ensure transparency regarding its inflation methodology, which will allow financial institutions to better anticipate and prepare for potential inflation or deflation adjustments. To further explain its methodology, the Bureau is providing the following illustration, which assumes that compliance with the rule was required beginning July 1, 2014, subject to the same five-year adjustment schedule described above. In this illustration, the base for computing each adjustment would be January 2015, which had a CPI–U value of 233.707. Here, the CPI–U value for January 2020 (257.971) would be used for the first five-year inflation update since January 2015 and would update the gross annual revenue threshold to reflect the change in the CPI between January 2015 and January 2020. As demonstrated with the formulas below, the percentage change between those two years' CPI–U values would be calculated (about 10.4 percent) and then would be applied to the $5 million gross annual revenue threshold to get a value of $5,519,112. This would be rounded to $5,500,000 and would become the new threshold effective in January 2021.

All subsequent adjustments would be made in the same manner. For instance, using the above illustrative example, the following calculation would be performed in January 2025 (ten years after January 2015, five years after January 2020):

The CPI–U series used for the Bureau's inflation adjustment methodology is public and can be used by anyone wishing to perform the calculation themselves. Additionally, the Bureau of Labor and Statistics provides an inflation calculator for this exact CPI–U series, which allows any entity to easily calculate an adjusted gross annual revenue threshold without the need for manual calculations.

In addition to new comment 106(b)(2)–2, discussed above, which clarifies the timing of its inflation adjustments, the Bureau believes that the adjustment schedule set forth below will also be helpful to explain the inflation adjustment timing:

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 enumerated in the statute in section 704B(b) and (e)(2). In addition, 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].” Section 1071's statutory purposes 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.

Proposed Rule

The Bureau proposed to adopt the data points enumerated in ECOA section 704B(b) and (e)(2)(A) through (G) largely consistent with its proposals under consideration at SBREFA, but with certain changes as discussed in the proposed rule. Consistent with its approach in the SBREFA Outline, the Bureau proposed data points pursuant to its statutory authority set forth in section 704B(e)(2)(H) relating to pricing, time in business, NAICS code, and number of workers. In addition, based on feedback from small entity representatives and other stakeholders and in the course of developing the proposed rule, the Bureau identified several additional data points that it believed would be important to the quality and completeness of the data collected and would aid significantly in furthering the purposes of section 1071. The Bureau proposed to adopt additional data points regarding application method, application recipient, denial reasons, and number of principal owners. In addition, the Bureau relied on ECOA section 704B(e)(2)(H), as well as its authority under 704B(g)(1), to propose certain clarifications to the data points enumerated in section 704B(b) and (e)(2)(A) through (G).

In regard to the specific method by which a financial institution would collect the data points, the proposed rule would have required a covered financial institution to compile and maintain data regarding covered applications from small businesses, and required that the data be compiled in the manner prescribed for each data point and as explained in associated Official Interpretations (included in the proposed rule) and the Filing Instructions Guide that the Bureau anticipated later providing on a yearly basis. The proposed rule then explained that the data compiled would include the items described in proposed § 1002.107(a)(1) through (21). The Official Interpretations, sometimes referred to as official comments or official commentary, would provide important guidance on compliance with the regulation and were discussed in relation to each data point as well as other regulatory provisions. The Filing Instructions Guide would provide instructions on the operational methods for compiling and reporting data, including which codes to report for different required information. The Filing Instructions Guide would be updated yearly, as is the Filing Instructions Guide that is used with HMDA compilation and reporting. Proposed comment 107(a)–1 would have provided general guidance on complying with § 1002.107(a).

The Bureau crafted the proposed rule in consideration of the concerns and input of the small entity representatives and other stakeholders. First, the proposed rule would generally not have required a financial institution to verify applicant-provided information and limited the data points proposed pursuant to ECOA section 704B(e)(2)(H) to those that the Bureau believed would be most useful for the purposes of section 1071. In addition, the Bureau considered the costs, including data quality scrubs, automation and training, that would be imposed by the collection and reporting of the proposed data points; these were discussed in the proposed rule and that discussion is now updated in part IX below. The Bureau attempted to craft the collection and reporting requirements to be as clear and operationally manageable as possible, and requested comment on potential methods for increasing clarity and manageability.

In regard to concerns from small entity representatives and other stakeholders about being required to collect applicants' protected demographic information for purposes of section 1071, the Bureau noted that several small entity representatives reported collecting this kind of information currently in certain situations (because they are CDFIs, or because they are participating in certain SBA or similar 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 also did not propose an exemption for small financial institutions from reporting data points adopted pursuant to ECOA section 704B(e)(2)(H), as suggested by some small entity representatives and commenters, though it did propose an exemption from the rule for certain institutions with limited small business credit originations.

The Bureau sought comment on its proposed approach to the collection and reporting of data points, including the specific requests for input above and in the section-by-section analysis of each of the proposed data points.

Comments Received

The Bureau received numerous comments discussing the general data point collection and reporting requirements from banks, trade associations, credit unions, farm credit institutions, community groups, lenders, research institutions, an association of State bank supervisors, and a Federal agency. This comment summary section will discuss the comments regarding the overall data points first, then focus on those that dealt specifically with the data points proposed pursuant to ECOA section 704B(e)(2)(H) (often making statements similar to those on the overall data points). Comments regarding individual data points are discussed below in the section-by-section analyses that follow.

General data point comments. Several community groups and a business advocacy group supported the overall data points requirements, stating that robust data are essential for understanding underwriting, gaps in lending, unmet community needs, and other issues that stand in the way of equitable, responsible lending. A business advocacy group stated that the recent enhancement of HMDA data proves the importance of robust data because of its strongly positive impact on lending to minorities. That commenter also stated that the rule should start out with the collection of granular data because discrimination often involves not only credit denials but also less favorable credit terms.

A joint comment letter from community groups, community oriented lenders, and business advocacy groups stated that CDFIs and mission-driven lenders, who will have to comply with the data point reporting requirements, view the costs as reasonable considering the benefits of the rule. Two community-oriented lenders made similar statements, saying that they already collect most of this information for underwriting and compliance with other requirements. One also stated that it does not plan to raise fees or restrict access to credit as a result of the rule. One rural community group stated that the data points will be important for understanding agricultural lending and for that reason supported the inclusion of agricultural lending under the rule.

Several industry commenters stated that the data points were too numerous and would be burdensome to collect and report. These commenters stated that setting up the compliance system would be particularly costly and that the cost would have to be passed on to customers, and one suggested that the Bureau should reconsider moving forward with the rule. These commenters also stated that financial institutions do not currently collect these data points. A trade association for online lenders stated that collecting these data points would interfere with online lenders' business model and the Bureau should obtain this information from other sources, such as the SBA, the Minority Business Development Agency, and the Treasury Department. A bank stated that 1071 data disclosure will help address significant racial and gender gaps but asked that the Bureau consider the depth and breadth of the data collected because community banks are faced with what it referred to as seemingly continuous data collection (for HMDA, Bank Secrecy Act, etc.) and regulatory exams. The bank also asked that the collection method be “SMART” (specific, measurable, attainable, realistic, and timely) in order to reduce burden.

Several banks suggested that HMDA data yield useful fair lending analyses in the residential mortgage market because those loans are underwritten similarly. In contrast, they stated, small business loans are more complex and unique and have to be manually underwritten to consider numerous variables in accordance with the individual institution's standards, rendering any fair lending analyses flawed and unreliable. One of these commenters suggested that if fair lending analysis is to be performed using only the data points proposed, lenders will be forced to revamp and substantially limit the inputs used in decision making, ultimately leading to a smaller number of product offerings and fewer approvals for small business loans overall.

Industry commenters also made several other suggestions and requests regarding the proposed data points. Two commenters asked that the Bureau eliminate or reduce the use of free-form text to report additional information, suggesting that the information gathered would be burdensome, hard to trend, open to different interpretations, and unreliable. Two commenters stated that it was important that applicants provide their information voluntarily. A trade association asked for reporting flexibility when information is not available, recommending the use of “declined to answer” if the applicant declined, and “not available” for all other circumstances in which the applicant did not provide the information notwithstanding the lender's inquiry.

One commenter asked for a rule provision stating that the collection and reporting requirements under the rule are not intended to limit the range of data that a financial institution may collect, use, and share for its own purposes. That commenter stated that technology companies currently use numerous data points when making credit decisions that enable them to extend credit to a wider range of applicants, and limiting their ability to do so could limit access to credit for small businesses.

Issues regarding data points proposed pursuant to ECOA section 704B(e)(2)(H). The Bureau received numerous comments from lenders, community groups, and individual commenters supporting inclusion of the data points proposed pursuant to ECOA section 704B(e)(2)(H). Several of these commenters stated that such data points are important because the dataset must include key underwriting variables in order to fulfill section 1071's fair lending purpose. One commenter stated that these data points are necessary to ensure proper analysis and not allow lenders, as HMDA reporters have done, to hide behind data not collected as a reason for lending disparities. Two commenters stated that such data points are necessary because robust data are needed to illuminate who lenders are serving and who they are excluding.

Several commenters stated that the Bureau must require the collection and public dissemination of a database detailed enough to meaningfully achieve section 1071's fair lending and community development purposes. Others suggested that the data points proposed pursuant to ECOA section 704B(e)(2)(H) will allow comparisons of small businesses in general with very small businesses, which they view as the bedrock of communities. One commenter said that such data points will help CDFIs better understand the small business credit market, especially in low-income communities, and whether and how discrimination in small business lending is occurring. That commenter and another also stated that robust data will help policymakers and the public to better understand lending gaps and unmet community needs.

One lender stated that the proposed data points will provide insight on the quality of the capital accessed by different demographic groups of small business applicants, which will be useful in not only identifying potentially discriminatory lending practices, but also highlight capital gaps in the marketplace that lenders may be able to fill. It also said that the data will show how financial institutions compare across key metrics and help determine if an institution has equitable lending, providing an unprecedented snapshot of the lending landscape for small businesses.

The Bureau received a large number of comments, mainly from industry, objecting to the inclusion of data points proposed pursuant to ECOA section 704B(e)(2)(H). Commenters made many objections, but the most common was that such data points are not collected now and would add significantly to the burden imposed by the rule, raising costs for borrowers. Many commenters also stated that several of these data points would be of little use and some suggested that they could result in inaccurate data. Many commenters suggested that the extra burden would reduce the availability of small business credit, and some stated that the extra burden of such data points would limit community banks' survivability and speed up consolidation and the closing of branches in rural and underserved communities. Other commenters also stated that these data points would be particularly difficult for institutions that do not have any reporting requirements under HMDA, credit unions, auto finance lenders, CDFIs, and/or smaller lenders in general. Several commenters stated that because farm credit associations are often customer owned, the increased costs would be imposed directly on the borrowers. One commenter stated that the data points proposed pursuant to ECOA section 704B(e)(2)(H) can fluctuate during loan processing, and would create tracking issues and reporting errors. Some commenters suggested that small business applicants would not want to provide so much information, which would slow down and interfere with the lending process.

Numerous commenters stated that small business lending is complex and nuanced and very different from residential lending, and the partial information provided by the data points would lead to inaccurate interpretations and potentially interfere with current credit approval methods. Several of these commenters stated that if statistical disparities are detected using the more straightforward data points adopted pursuant to ECOA section 704B(e)(2)(A) through (G), those disparities can be researched on an institution, transaction, or file basis, providing the same information that the Bureau has proposed to collect pursuant to 704B(e)(2)(H), but within context and without raising false positive flags. Those commenters and others stated that including too many unreliable and nuanced data point analyses will result in numerous false positives and inaccurate and unfair conclusions by community groups and their members, and potentially regulators. A State bankers association stated that these data could be used against banks as a competitive advantage for credit unions and other non-traditional lenders. Conversely, a credit union trade association stated that any rule to implement section 1071 will widen the competitive gulf between credit unions and big banks and “fintechs” that have the economies of scale and the technological sophistication to automate complex functions, and the data points proposed pursuant to ECOA section 704B(e)(2)(H) would make this problem worse. Another commenter stated that it would be unfair to compare some such data points between regulated and non-regulated entities because regulated entities have additional costs.

Some commenters who objected to the inclusion of data points pursuant to ECOA section 704B(e)(2)(H) suggested that the Bureau should first require the data points enumerated in 704B(e)(2)(A) through (G), then add any other appropriate data points over time. They explained that this approach would allow the Bureau to assess the burden and potential restriction of small business credit imposed by the data points in 704B(e)(2)(A) through (G) before moving forward with further requirements only if appropriate and beneficial. Some commenters also pointed out that HMDA reporting evolved over many years and the “all at once” approach in the proposal is a mistake and will not allow lenders time to adjust.

Several small lenders and their trade associations stated that if the Bureau opts to require some or all of the data points proposed pursuant to ECOA section 704B(e)(2)(H), then it should consider partial collection of data for community banks and other small lenders. A trade association for community banks suggested that the cost of such data points would include expensive data quality scrubs to avoid negative exam findings, which would be disproportionately borne by smaller financial institutions. That commenter was also concerned that the rule could require the standardization and homogenization of small business lending, damaging the customized and relationship-based lending for which community banks are valued. The commenter went on to state that if community banks are forced to standardize, it will especially harm the vulnerable small businesses that most benefit from the high-touch, relationship-based lending that they offer.

Some commenters stated that the data points proposed pursuant to ECOA section 704B(e)(2)(H) would create serious privacy risks. Several commenters suggested that this was especially a concern in rural areas where the applicant might be identified through certain data points, such as the combination of the NAICS code and census tract, and this risk might lead some small businesses to not apply for credit. Some of these commenters also stated that it would be disadvantageous for financial institutions to have access to pricing terms of their competitors. One of these commenters stated that collecting more data points would increase business borrower perception that this information is being used in the credit decision.

One commenter suggested that data collection mandates in excess of what the law requires may be found to be “arbitrary and capricious,” if a court decides that the Bureau has “relied on factors which Congress has not intended it to consider” or “offered an explanation for its decision that runs counter to the evidence before the agency.” The commenter did not explain whether or how the proposed data points might be viewed this way. Another commenter stated that the full scope of data that the rule would require financial institutions to report is inconsistent with the operation of business credit markets, and that Congress established a limited scope data collection regime in section 1071. That commenter further stated that if Congress intended to require all covered financial institutions to proactively deliver the same data required in fair lending enforcement actions, Congress would have written that into the law. Although not specifically mentioning the relevant legal standard for inclusion of such data, several industry commenters argued that some or all of the data points proposed pursuant to ECOA section 704B(e)(2)(H) would not fulfill the purposes of section 1071.

Final Rule

As discussed in the section-by-section analyses that follow, the Bureau has made changes to many of the proposed data points in order to carry out the purposes of section 1071 more effectively and to reduce any difficulties the rule might impose on small business lenders. In particular, the Bureau has sought to: (1) improve the usefulness of the data points for fair lending analysis and for business and community development purposes; and (2) facilitate compliance by, among other things, focusing on the reporting of information the financial institution already collects or possesses. The Bureau's NPRM approach, comments received, and final rule (including changes to specific data points) are discussed for each data point in turn. The Bureau notes that proposed § 1002.107(a)(19), “women-owned business status,” has been combined with proposed § 1002.107(a)(18), “minority-owned business status,” and the final § 1002.107(a)(18) data point now addresses “minority-owned, women-owned, and LGBTQI+-owned business statuses.” As a result, the data points in proposed § 1002.107(20) and (21) have been renumbered as final § 1002.107(19) and (20).

The Bureau is finalizing the introductory text to § 1002.107(a), regarding data format and itemization, to reflect the number of data points in the final rule. Final § 1002.107(a) provides that a covered financial institution shall compile and maintain data regarding covered applications from small businesses, and that the data shall be compiled in the manner prescribed in the individual data point provisions and the Filing Instructions Guide for subpart B for the appropriate year. Furthermore, the data compiled shall include the items described in final § 1002.107(a)(1) through (20). The Bureau believes that these methods will facilitate compliance and yield quality data, and did not receive comments on the specific text of § 1002.107(a) or associated commentary.

The Bureau is finalizing comment 107(a)–1 to provide general guidance on complying with § 1002.107(a). Comment 107(a)–1 explains that a covered financial institution (i) reports the data enumerated in § 1002.107(a) even if the credit originated pursuant to the reported application was subsequently sold by the institution; (ii) annually reports data for covered applications for which final action was taken in the previous calendar year; and (iii) annually 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 will clarify a financial institution's collection and reporting requirements and so facilitate compliance. The Bureau also believes that these instructions will help to ensure the accuracy and consistency of the data collected and reported. The Bureau did not receive comments on comment 107(a)–1.

The final rule adds new comment 107(a)–2, which explains that a covered financial institution may use technology such as autocorrect and predictive text when requesting applicant-provided data under subpart B that the financial institution reports via free-form text fields, provided that such technology does not restrict the applicant's ability to write in its own response instead of using text suggested by the technology. The Bureau believes that the ability to use autocorrect and predictive text will facilitate the use of free-form text boxes. The Bureau considered commenters' objections to the use of free-form text boxes for collecting and reporting data under this final rule. Although the Bureau is aware that data collected with predetermined lists is easier to report and work with, the Bureau believes that free-form text responses will provide useful information that would not otherwise be collected, as they have done for HMDA data, and the use of autocorrect and predictive text will facilitate use of free-form text boxes and reduce inadvertent errors or typos.

The Bureau is finalizing comment 107(a)–3 (which was numbered as comment 107(a)–2 in the proposal) as proposed, except that the final rule adds a web address instead of the placeholder in the proposed rule. Final comment 107(a)–3 explains that additional details and procedures for compiling data pursuant to § 1002.107 are included in the Filing Instructions Guide, which is available at https://www.consumerfinance.gov/data-research/small-business-lending/filing-instructions-guide/ . As explained above, the Bureau did not receive comments on the use of the Filing Instructions Guide.

The Bureau is also adding new comment 107(a)–4, to make clear that the Bureau may add additional response options to the lists of responses contained in certain of the individual data-point comments, via the Filing Instructions Guide, and instructs financial institutions to refer to the Filing Instructions Guide for any updates for each reporting year. For example, a credit purpose provided frequently in the free-form text box for that data point could be added to the response options via listing in the Filing Instructions Guide. The Bureau believes that such flexibility will enhance the quality and currency of the data collected. In addition, because financial institutions must refer to the Filing Instructions Guide when compiling, maintaining and reporting their data, the Bureau does not believe that this flexibility will add operational difficulty to the reporting of data under this final rule.

General data point issues. In regard to the comments suggesting that the overall data point collection regime is too burdensome, the Bureau notes that most of the data points are enumerated in the statute and the Bureau has implemented the data points in such a way as to reduce the burden of compilation and reporting as much as feasible while fulfilling the purposes of section 1071. The Bureau does not require verification of applicant-provided data, allows responses of “not applicable” and “not provided by applicant and otherwise undetermined” when appropriate, and provides several safe harbors to facilitate compliance. In addition, the Bureau believes that it has set up the compilation and reporting system in a way that is specific, measurable, attainable, realistic and timely, as requested by a commenter. In addition, see the discussion below regarding other data points considered for further information on the question of the rule's burden and the issue of accuracy of fair lending analysis and small business credit data.

In regard to the suggestion that the Bureau use other sources to obtain information regarding small business credit instead of via this rulemaking, as explained above the Bureau does not believe that currently available sources are sufficient to carry out the purposes of section 1071, and Congress required the Bureau to promulgate a rule to collect the data. In addition, the Bureau notes that the data collected under this rule are not exclusive, and financial institutions may collect any other data allowable under current law to use in processing or underwriting small business credit. For this reason, the Bureau does not believe that this final rule will interfere with online lenders' business practices, which a commenter was concerned about, or the business practices of other entities that offer small business credit. In addition, the Bureau does not believe that compilation of data under this final rule will interfere with relationship banking by community banks, because they will continue to be able to relate to and serve customers as they have done previously, and may continue to make credit decisions in any legally appropriate fashion that they have done in the past.

As for the commenter's concern that applicant responses be voluntary, the Bureau notes that although financial institutions are required to have processes and procedures in place to collect these data, applicants are free to choose not to answer their requests. For the collection of demographic data, applicants may select an option of “I do not wish to respond” or similar. For many of the other data points, so long as a financial institution maintains procedures reasonably designed to collect applicant-provided data, a financial institution may report “not provided by applicant and otherwise undetermined.” In regard to the commenter's request that the Bureau allow responses of “declined to answer” and “not available,” the Bureau believes that the reporting options of “not provided by applicant and otherwise undetermined” and “not applicable” are more suited to this data collection, and notes that the commenter did not explain why the suggested responses would be better.

Issues regarding data points adopted pursuant to ECOA section 704B(e)(2)(H). The Bureau is finalizing its proposed data points with certain changes as described in the respective section-by-section analyses of those data points below. The Bureau is relying on ECOA section 704B(e)(2)(H), as well as its authority under 704B(g)(1), to make clarifications to certain of the data points set forth in 704B(b) and (e)(2)(A) through (G), as described in the section-by-section analyses of those data points below.

Pursuant to its statutory authority set forth in ECOA section 704B(e)(2)(H), the Bureau is adopting data points for pricing, time in business, NAICS code, number of workers, application method, application recipient, denial reasons, and number of principal owners. The Bureau has determined that these data points will serve the purposes of section 1071, improve the utility of the data for stakeholders, and reduce the occurrence of misinterpretations or incorrect conclusions based on analysis of an otherwise more limited dataset. In finalizing these data points, the Bureau considered the additional operational complexity and potential reputational harm described by commenters that collecting and reporting these data points could impose on financial institutions. The Bureau seeks to respond to industry concerns by adopting a limited number of data points that will offer the highest value in light of section 1071's statutory purposes. For this reason, the Bureau is not adopting certain additional data points suggested by commenters such as credit score, applicant's disability status, or business structure (see the discussion below).

In addition, the Bureau did not choose to take an incremental approach to adding data points, as several commenters suggested, or permit collecting and reporting of certain data points to be phased in over time. The Bureau believes the information from the data points adopted pursuant to ECOA section 704B(e)(2)(H) will enhance the usefulness of the data points enumerated in 704B(e)(2)(A) through (G), and further section 1071's purposes for the reasons stated above and in the descriptions of those data points in the section-by-section analyses below, and so should be collected and reported as soon as possible. In addition, data from these data points will be an important part of the privacy risk assessment that the Bureau will conduct after the first full year of data are received. In response to the commenters who expressed concern about privacy risks, the Bureau notes that when making modification and deletion decisions prior to publication of the data, it intends to consider re-identification risk and other cognizable privacy risks. See part VIII below for additional information.

As explained above, numerous industry commenters stated that data points adopted pursuant to ECOA section 704B(e)(2)(H) would make the rule more burdensome, result in greater costs for not only financial institutions but also their small business customers, and potentially lead to a reduction in credit availability. The Bureau does not believe that the effects on the small business credit market from the data points adopted pursuant to ECOA section 704B(e)(2)(H) will be so pronounced. Rather, such data points will add only incremental costs to the rule, and the Bureau has carefully crafted all the data points in the final rule to provide flexibility by allowing reporting of information that is already present in the credit file or easily gathered from the applicant. In addition, the final rule does not require verification, allows for responses of “I do not wish to respond” or similar, “not applicable,” and “not provided by applicant and otherwise undetermined” when appropriate, and provides several safe harbors to facilitate compliance and reduce costs in the compilation and reporting of the data points.

Numerous industry commenters also stated that the small business credit market is different from the residential housing market disclosed in HMDA data, and the varied and complex nature of the small business application, underwriting and approval processes will cause the data collected pursuant to ECOA section 704B(e)(2)(H) to suggest false positives for discrimination. Although the potential risk of misinterpretation exists with all public data, the Bureau notes that any fair lending analysis of the public dataset should be considered preliminary to meaningful further investigation, and inferences from the public data alone are not determinative of unlawful discrimination. Furthermore, the Bureau believes that the additional information from these data points is more likely to eliminate false positives than to create them. For example, knowing applicants' time in business will help to avoid comparing credit outcomes for established businesses with outcomes for riskier start-ups and expecting them to be similar. In this way, regulators engaged in fair lending analysis, and the financial institutions they are examining or researching, will be able to avoid unnecessary further investigation.

Many industry commenters also suggested that information from data points adopted pursuant to ECOA section 704B(e)(2)(H) will be unreliable and not useful for data users. However, the Bureau considers the information required to be reported to be very useful in fulfilling the fair lending and business and community development purposes of section 1071, as explained in the section-by-section analysis of each of these data points below. Although, as one commenter pointed out, some of these data may change in the course of credit processing, HMDA data and the data from the data points specified in ECOA section 704B(e)(2)(A) through (G) often do the same. The Bureau believes that financial institutions will use the appropriate information from the credit file and report accurately, as the overwhelming majority of HMDA reporters do now.

As explained above, some commenters stated that many applicants will not want to provide the requested information and some may be concerned that the information will be used in the credit decision if too much information is requested. The Bureau does not believe that these problems will be widespread, and to the extent that they do manifest, the financial institution can use the appropriate responses to indicate that the applicant did not wish to provide information. The Bureau also believes that applicants for small business credit expect to be asked for numerous pieces of information, and the applicant-provided data points adopted pursuant to ECOA section 704B(e)(2)(H) (NAICS code, number of workers, time in business, and number of business owners) do not appear likely to raise red flags.

Other commenters were concerned that different types of financial institutions would fare differently regarding the data points adopted pursuant to ECOA section 704B(e)(2)(H), and this difference would create competitive distortions. The Bureau does not believe that the structure of a financial institution will have a large effect on the difficulty of reporting such data points. Because all covered financial institutions have the same responsibilities under this final rule, the Bureau believes that the effects on different financial institution types will be similar. Numerous commenters also stated that small financial institutions, such as community banks and small credit unions, would be disadvantaged because they lack the economies of scale to allow them to readily absorb the rule's costs. Several of these commenters requested an exemption for these institutions from any data points adopted pursuant to ECOA section 704B(e)(2)(H), but the Bureau has determined that such an additional exemption that focuses specifically on such data points is not appropriate. As explained in the section-by-section analysis of § 1002.105 above, the proposed exemption for certain institutions with limited small business credit originations is now finalized at a higher transaction level than proposed, exempting a larger number of small financial institutions from section 1071's data collection and reporting obligations. Furthermore, the usefulness of the data collected would be reduced if the dataset is incomplete for some financial institutions. In addition, the Bureau will provide assistance to small institutions and compliance vendors during the implementation period to help them transition to the new rule's requirements.

In regard to the commenters who discussed legal issues involved in this rulemaking, the Bureau notes that each of the data points adopted pursuant to ECOA section 704B(e)(2)(H) fulfills the purposes that Congress stated in section 1071, fair lending and business and community development, as explained in the section-by-section analyses that follow. In addition, the Bureau has carefully considered the evidence before it, including from the SBREFA process and public comments, and has based its decisions regarding these data points on that evidence in relation to the factors that Congress intended it to consider. Furthermore, as explained above, the Bureau does not consider that the full data collected, whether pursuant to ECOA section 704B(e)(2)(A) through (G) or pursuant to section 704B(e)(2)(H), should be used alone to determine whether a lender is complying with fair lending laws. When regulators conduct fair lending examinations, they will consider additional information before reaching a determination about an institution's compliance. The Bureau considers the scope of data reported to be well within the parameters of congressional intent apparent in section 1071.

Other Data Points Considered

As mentioned above, small entity representatives and other stakeholders suggested some additional data points for the Bureau's consideration, and the Bureau considered others in the development of the 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 chose not to propose to include any of the following data points in the rule. Nonetheless, the Bureau sought 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-corporation, limited liability company, partnership, etc.). This information could be useful in providing context to the ethnicity, race, and sex data regarding applicants' principal owners. However, the Bureau believed 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 believed 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 was 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 was 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 believed that collecting the number of principal owners (those individuals who each directly own 25 percent or more of the equity interests of a business), 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 believed that the usefulness of the data collected might 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 believed 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.

Comments Received

Type of business/entity structure. The Bureau received comments from some lenders, community groups, and others requesting the inclusion of a data point for type of business structure. The Bureau did not receive any comments specifically opposing the inclusion of type of business structure, though the Bureau understands the overwhelming industry opposition to all data points adopted pursuant to ECOA section 704B(e)(2)(H) likely implicates this one.

Commenters stated that collecting type of business structure would allow for better analysis of credit outcomes, because different structures may indicate varying levels of sophistication and can be viewed differently by creditors. One commenter pointed out that Black and Latino business owners are more likely to have non-employer businesses, and type of business structure could help identify those businesses and track their access to credit. That commenter also stated that without the information about business structure, it will not be possible to identify gaps in capital access between sole proprietorships (often minority owned) and other forms, and so collecting business structure will help ensure that future capital programs, whether private or public, adequately include or target business structures. One commenter stated that business structure, along with credit score, would be important for rooting out patterns of discriminatory or exclusionary lending practices in the deep South. A CDFI lender stated that being able to differentiate between sole proprietors versus corporations is also key for philanthropic efforts that may aid the work of mission-based lenders working with specific underserved communities, and added that it already collects this information for the SBA 7(a) program, Paycheck Protection Program, and the CDFI Fund. Discussing the Bureau's suggestion that collecting the number of principal owners would provide the desired context, a commenter stated that under the proposal, only a natural person who directly owns at least 25 percent of a business is counted as a principal owner, and thus a partnership, corporation, and sole proprietorship could appear similarly situated despite presenting different credit needs.

Credit score. The Bureau received numerous comments from community groups, community-oriented lenders, business advocacy groups, and others requesting the inclusion of a data point for credit score. The Bureau did not receive any comments specifically opposing the inclusion of credit score, though the Bureau understands the overwhelming industry opposition to all data points adopted pursuant to ECOA section 704B(e)(2)(H) as likely implicating this one.

Commenters stated that including a data point for credit score, along with other key underwriting criteria, was important for effective fair lending analysis. A joint letter from community and business advocacy groups stated that the Federal Reserve Banks in their annual small business surveys have found large disparities in credit access even after controlling for credit scores, and other commenters agreed that this was the case. Many compared the situation to HMDA, where credit scores were only recently required, suggesting that the lack of credit scores allowed lenders to avoid accountability. A number of community groups stated that, in addition to fair lending, credit scores allow users to understand the characteristics of applicants that are denied credit so as to identify areas of unmet need. A joint letter from community groups and community oriented lenders stated that more than half of Black individuals and 41 percent of Latinos have low or no credit scores, which impacts their ability to access financing. One community group stated that since the Bureau implemented the expanded HMDA data collection rules, they have determined that in their county Black mortgage applicants are more than 10 percent likelier than white applicants to be denied for credit history, and that having more robust information would allow them to better advocate to their financial partners for more equitable credit scoring models in small business lending. A CDFI lender stated that lenders rely heavily on credit scores to assess borrower risk and creditworthiness, and they are used in many cases to screen for pre-qualified and/or pre-approved applicants before moving further in the application process. Several rural community groups stated that credit score reporting would be important for analyzing potential discrimination in farm credit.

Numerous commenters suggested that requiring credit scores would not be as complicated or difficult as the Bureau stated in the proposed rule, pointing out that HMDA currently requires credit score reporting and this rule could use a similar method. Commenters said lenders that rely on an individual or composite credit score of business owners should be required to report that score and the scoring model used, as is currently required under HMDA. A CDFI lender stated that it would be straightforward for lenders to disclose borrower credit scores, type (personal or business), and scoring model and version in accordance with HMDA procedures, including the options to select not applicable and write in the name and credit scoring model if not listed. Once commenter suggested requiring only personal credit scores because business scores were not yet industry standard. A community group suggested that the Bureau use the Federal Reserve Bank of Atlanta's small business credit survey method, which they said accommodates a single score irrespective of how it was used by the lender. Another CDFI lender stated that it already collects credit score for the CDFI Fund. Several commenters stated that privacy would not be a problem, and some suggested that credit scores could be released in ranges or other non-specific methods to avoid any issue.

Disability status. Although the Bureau did not propose or seek comment on the possibility of including the disability status of applicant owners as a data point, a number of commenters requested that the Bureau do so. An advocacy group for persons with disabilities stated that this population is twice as likely as people without disabilities to be living in poverty, twice as likely to use costly nonbank lending, and twice as likely to be unbanked. They stated further that people with disabilities that are part of the labor force are more likely to own small businesses than those without disabilities, and that for a growing number of adults with disabilities, establishing small businesses has become a viable path to improve their economic stability and security. Finally, they stated that the absence of disability data renders people with disabilities invisible and creates an obstacle to understanding and analyzing potential discriminatory lending practices and creates a challenge in advocating for and designing effective policies. Other commenters referred to and supported this organization's comment letter.

Some commenters stated that discrimination against people with disabilities is clearly present in society, and several suggested that including a disability data point would further enforcement and implementation of section 1071, the Americans with Disabilities Act, and various bank vendor procurement programs, amongst other laws and initiatives. One commenter stated that people with disabilities often face significant economic disparities such as lower net worth or thinner credit history that may create barriers to entrepreneurship. A CDFI lender stated that it already collects this information for the SBA 7(a) program.

Additional agricultural data. Although the Bureau did not propose or seek comment on the issue, two rural community groups requested that the final rule include additional data points regarding agricultural credit. One of these commenters stated that the Bureau should require reporting of farm marketing strategies, years of farmer experience, and certain kinds of farm production certifications (USDA Organic, animal welfare, labor standard certification, etc.) to help determine if all farm operations are treated equally in the lending process. The other requested that information regarding base acre payments (farm program benefit payments) be reported because information on program benefits attached to base acres is valuable to minority farmers' farm credit loan making and servicing. That commenter also asked that the Bureau require reporting on collateral requirements, on differences in appraised value or loans or loan modifications rejected based on failure to appraise, on refinancings precipitated by required graduation from Farm Service Agency loans, and on all forms of loan modifications that have historically been a central factor in farm loss for farmers of color.

Other requested data points. The Bureau received requests for several other additional data points that were not proposed and on which it did not seek comment. Commenters suggested that the Bureau require reporting on veteran status, limited English proficiency status, and senior citizen status in order to monitor risks to these groups. A CDFI lender stated that it already collects veteran status for SBA 7(a) loans and other programs. They also stated that it collects information on low-income owned or controlled status for the CDFI Fund, though did not specifically ask the Bureau to require reporting of that information or veteran status.

Commenters also requested that the Bureau require reporting of the appraised value of collateral in relation to the loan amount, the origination date, community of residence (using ZIP code, school zone or other demographic data), the type of purchaser of the originated credit, and a legal entity identifier (LEI) for the small business applicant.

Final Rule

The Bureau is adopting a limited number of data points pursuant to the authority set forth in ECOA section 704B(e)(2)(H) that it believes will offer the highest value in light of section 1071's statutory purposes. The Bureau believes that the potential additional data points that it sought comment on would pose operational complexities, as would the other data points suggested by commenters. For these reasons, and the reasons explained below, the Bureau is not including any of the following data points in this final rule.

Type of business/entity structure. The Bureau believes that collecting the number of principal owners will be more useful than type of business structure in providing additional useful context to the ethnicity, race, and sex data regarding applicants' principal owners. In addition, the Bureau believes that the number of workers and gross annual revenue data points will provide useful context regarding the size and sophistication of the applicant, which appears to address the primary reason that commenters wanted type of business structure to be collected.

Credit score. Although the Bureau agrees with commenters that this data would be useful for fair lending analyses, it nonetheless could be quite complicated and involve complex sub-fields, which could pose operational difficulties for financial institutions, especially given the use of business credit scores as well as personal credit scores in small business lending.

Disability status. The Bureau did not propose or seek comment on including this data point, and so does not have the benefit of robust stakeholder input as to whether and how to implement it. More importantly, ECOA does not include disability as one of the enumerated bases on which discrimination is prohibited, and so it is not clear that the Bureau has the legal authority to include this data point.

Additional agricultural data. The Bureau did not propose or seek comment on including these data points, and so does not have the benefit of robust stakeholder input as to whether and how to implement them. In addition, the Bureau does not have sufficient other information to assess the importance or feasibility of requiring that these data points be reported.

Other requested data points. The Bureau did not propose or seek comment on including these data points regarding veteran, limited English proficiency, and senior citizen status, and so does not have the benefit of robust stakeholder input as to whether and how to implement them. In addition, the Bureau does not have sufficient other information to assess the importance or feasibility of requiring that these data points be reported.

Credit reporting information, including whether credit information was accessed. Commenters did not focus on this potential additional data point that the Bureau sought comment on, instead focusing their requests on the related potential credit score data point discussed above. For the reasons discussed above, the Bureau is not including this data point in the final rule.

Percentage ownership of each principal owner and percentage ownership by women and by minorities. The Bureau did not receive comments on this potential additional data point that the Bureau sought comment on. For the reasons discussed above, the Bureau is not including this data point in the final rule.

Whether the applicant has an existing relationship with the financial institution and the nature of that relationship. The Bureau did not receive comments on this potential additional data point that the Bureau sought comment on. For the reasons discussed above, the Bureau is not including this data point in the final rule.

Customer number, and/or unique (but anonymous) identification number for applicants or associated persons for tracking of multiple applications. The Bureau did not receive comments on this potential additional data point that the Bureau sought comment on. For the reasons discussed above, the Bureau is not including this data point in the final rule.

107(a)(1) Unique Identifier

Proposed Rule

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, 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. Both the universal loan identifier and the non-universal loan identifier use only alphanumeric characters, and do not allow use of identifying information about the applicant or borrower in the identifier. The universal loan identifier is “unique” in the national HMDA reporting market because it uses a unique LEI for the reporting institution and then the identifier is required to be unique within that institution. The universal loan identifier must be no more than 45 characters and the non-universal loan identifier must be no more than 22 characters.

The Bureau proposed to require that financial institutions report an alphanumeric identifier starting with the LEI of the financial institution. This unique alphanumeric identifier would have been required to be unique within the financial institution to the specific covered application and to be usable to identify and retrieve the specific file corresponding to the application for or extension of credit. The Bureau also proposed commentary with additional details, as discussed below.

For clarity, the Bureau included language in proposed comment 107(a)(1)–1 that would have explained that the identifier can be assigned at any time prior to reporting the application. Proposed comment 107(a)(1)–1 would also have provided the formatting requirements for the unique identifier. The Bureau proposed an identifier of 45 characters or fewer, as is currently required for HMDA. The Bureau made 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 have also explained 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 have made 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 was aware that internal identification numbers assigned by the financial institution to the application or applicant could be considered directly or indirectly identifying information, and requested comment on this issue. The Bureau also noted that due to privacy risks the Bureau was proposing to not publish unique identifier in unmodified form; the Bureau sought comment on potential modifications to or deletion of this data point in the published application-level data. Proposed comment 107(a)(1)–2 would have also cross-referenced proposed § 1002.111(c) and related commentary, which would have prohibited 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 proposed to require that the unique identifier begin with the financial institution's LEI. Pursuant to proposed § 1002.109(b)(1)(vi), any covered financial institution that did not currently use an LEI would have been required to obtain and maintain an LEI in order to identify itself when reporting the data. Although a “check digit”—a portion of an identifying number that can be used to check accuracy—is required for the HMDA universal loan identifier, the Bureau did not propose to require its use in the 1071 unique identifier.

The Bureau sought comment on its proposed approach to the unique identifier data point. In addition, the Bureau requested comment on the use of the LEI in the unique identifier and the possible use of a check digit.

Comments Received

The Bureau received comments on the unique identifier data point from several lenders and trade associations. Some commenters supported the data point as proposed; several stated that it was a reasonable and appropriate means of implementing the statutory requirement. Another lender noted that it already reports this type of data for Paycheck Protection Program and CDFI Fund lending. A trade association stated that community banks prefer not to be required to create this identifier too early in the credit origination process. A national auto finance trade association noted that its members generally assign application or loan numbers to new credit applications, but not necessarily to credit line increases, and suggested that financial institutions will have this data without needing the Federal Reserve to issue a parallel rule to implement section 1071 for motor vehicle dealers.

A community bank stated that the cost of creating a customer identification numbering system that does not use the employer identification number, taxpayer identification number, or Social Security number (SSN) would be passed on to the borrower. That commenter requested that the Bureau allow use of the last four digits of the employer identification number, taxpayer identification number, or SSN for identification purposes. They also expressed confusion as to how an LEI (which it may not currently have) could be incorporated with the loan number in its system for reporting, and stated that the Bureau did not provide sufficient guidance on how to incorporate the unique identifiers into its current system.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(a)(1) with a minor edit for clarity. Financial institutions will report an alphanumeric identifier, starting with the LEI of the financial institution, that is unique within the financial institution to the specific covered application. The identifier must be usable to identify and retrieve the specific file or files corresponding to the application for or extension of credit.

The Bureau is finalizing comment 107(a)(1)–1 with a minor change. As apparent from the instructions in comment 107(a)(1)–1, the Bureau chose to follow the well-known and workable HMDA format to avoid introducing new complications. With respect to the concerns raised by one commenter about the unique identifier data point, the Bureau notes that a customer identification number is not required. The unique identifier refers to the application or origination being reported, not the customer who applies for or borrows the funds. In addition, comment 107(a)(1)–1 makes clear that financial institutions may assign the unique identifier at any time prior to reporting the application, facilitating compliance. The Bureau believes that final § 1002.107(a)(1) will accommodate different institutions' numbering systems because the unique identifier can be created separately from those internal systems. In order to foster uniformity of format and avoid confusion as to what constitutes a “unique” identifier, comment 107(a)(1)–1 now requires that any alphabetical characters in the unique identifier be upper-case.

The Bureau is finalizing comment 107(a)(1)–2 with a minor change described below. Final comment 107(a)(1)–2 states that the unique identifier must not include any directly identifying information regarding the applicant or persons (natural or legal) associated with the applicant. In regard to the use of directly identifying information, such as an SSN or taxpayer identification number, the Bureau notes that section 1071 specifically forbids financial institutions from using personally identifiable information concerning any individual who is, or is connected with, an applicant in compiling and maintaining data for reporting. Although the Bureau has preliminarily determined not to release unique identifier data reported to the Bureau in unmodified form in the public, application-level dataset, inclusion of a small business's employer identification number or a natural person's SSN or taxpayer identification number could present a risk of fraud or identity theft. Thus, for clarity, the Bureau is including in comment 107(a)(1)–2 that SSN and employer identification number, in whole or partial form, are examples of directly identifying information that must not be used.

The final rule requires that the unique identifier begin with the financial institution's LEI. Final § 1002.109(b)(1)(vi) requires any covered financial institution that does not currently use an LEI to obtain and maintain an LEI in order to identify itself when reporting data to the Bureau. The Bureau does not believe that including the financial institution's LEI in its unique identifiers will pose particular difficulties for reporting institutions; as noted above, the unique identifier can be assigned at any time prior to reporting an application. The Bureau also believes that including the LEI will increase the specificity and usefulness of the identifier and the record it identifies.

The Bureau did not receive comments discussing the possible inclusion of a “check digit,” which is required for the HMDA universal loan identifier but was not proposed as part of the 1071 unique identifier. The Bureau believes that, based on its expectations for small business lending data submission platform, a check digit will be unnecessary, as well as potentially complicated for small financial institutions to implement, and thus it is not included in the final rule.

107(a)(2) Application Date

Proposed Rule

ECOA section 704B(e)(2)(A) requires financial institutions to collect and report the “date on which the application was received.”

The Bureau proposed 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 comments 107(a)(2)–1 and –2 would have clarified the need for a financial institution to take a consistent approach when reporting application date, and would have provided guidance on how to report application date for applications not submitted directly to the financial institution or its affiliate (indirect applications). The Bureau also proposed a safe harbor in § 1002.112(c)(4), which would have provided 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 sought comment on its approach to collecting application date in proposed § 1002.107(a)(2) and associated commentary. The Bureau also sought comment on how best to define the “application date” data point in light of the Bureau's definition of “covered application” in proposed § 1002.103.

Comments Received

The Bureau received feedback on its proposal to require reporting of application date in § 1002.107(a)(2) from several lenders, trade associations, and a community group. Most commenters to address this data point supported proposed § 1002.107(a)(2). A trade association stated that application date is currently collected in its financial institutions' work flows. A trade association urged the Bureau to define application date in a manner that is consistent with existing Regulation B, so to avoid inconsistency, though it did not identify any aspect of proposed § 1002.107(a)(2) that would be inconsistent with existing Regulation B. Similarly, a bank urged the Bureau to align application date with HMDA—to increase efficiency for the customer, facilitate compliance, and avoid duplicative collections—but did not identify whether or how proposed § 1002.107(a)(2) would differ from how financial institutions report application date under Regulation C. A community bank urged the Bureau to provide a concrete definition of application date, explaining that a subjective definition would discourage banks from small business lending, and that application date is often difficult to pinpoint as there frequently is no written application and the application process may occur over time, both in-person and by phone.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(a)(2) to require reporting of application date as the date the covered application was received or the date on a paper or electronic application form. The Bureau believes the flexibility to report either the date the covered application was received or the date shown on a paper or electronic application form will accommodate institutions' varied practices. While several commenters urged the Bureau to align reporting of application date with existing Regulation B and Regulation C, the commenters did not identify how the proposed definition would differ from those regulatory provisions, and the Bureau believes they do not conflict. For example, a financial institution may report application date based on the date a “covered application” was received, and final § 1002.103(a) defines a covered application largely based on Regulation B's definition of an application in existing § 1002.2(f). Similarly, Regulation C § 1003.4(a)(1)(ii) requires reporting of the date the application was received or the date shown on the application form. While a commenter urged the Bureau to provide a concrete definition of application date, the commenter never indicated whether or how the proposed definition was vague.

Final § 1002.107(a)(2) states that application date may be the date “the covered application was received;” the Bureau has removed the phrase that followed in proposed § 1002.107(a)(2), which read “by the financial institution . . . ” to reflect that not all covered applications will be received directly by the financial institution. The Bureau is also adopting new comment 107(a)(2)–2 to provide guidance on when an application is “received” for covered applications submitted directly to the financial institution or its affiliate.

Comment 107(a)(2)–1 is finalized with minor revisions for clarity and consistency, to provide guidance on maintaining a consistent approach to reporting application date. Final comment 107(a)(2)–3 (proposed as comment 107(a)(2)–2) provides guidance on how a financial institution reports application date where a covered application was not submitted directly to the financial institution or its affiliate. Lastly, final comment 107(a)(2)–4 is adopted to note the safe harbor in final § 1002.112(c)(1), which provides that a financial institution does not violate subpart B if it reports on its small business lending application register an application date that is within three business days of the actual application date pursuant to final § 1002.107(a)(2).

107(a)(3) Application Method

Proposed Rule

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.

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 small entity representative 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. Relatedly, several small entity representatives 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.

In light of the feedback during the SBREFA process and further consideration by the Bureau of additional data that would aid in fulfilling the purposes of section 1071, the Bureau proposed to require financial institutions to collect and report application method. The Bureau proposed § 1002.107(a)(3) to define this data point as the means by which the applicant submitted the covered application directly or indirectly to the financial institution. The Bureau also proposed commentary to accompany proposed § 1002.107(a)(3).

The Bureau believed 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 and the business and community development purposes of section 1071. In addition, the Bureau believed that collecting data on application method would aid in analysis of multiple data points collected and reported by financial institutions, including the ethnicity, race, and sex of applicants' principal owners.

Finally, data on application method would assist in analyzing data reported under, and assessing compliance with, proposed § 1002.107(a)(20), which would have required financial institutions to collect principal owners' ethnicity and race via visual observation or surname in certain circumstances. The Bureau explained that having application method reporting would 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.

The Bureau proposed comment 107(a)(3)–1 to clarify that a financial institution would comply with proposed § 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 have explained 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 comments 107(a)(3)–1.i through .iv would have provided detailed descriptions and examples of each of the four proposed application methods.

The Bureau proposed comment 107(a)(3)–2 to 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 have reported 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 § 1002.107(a)(20). Proposed comment 107(a)(3)–2 also would have provided separate examples of when the application method should be reported as “online” and “mail.”

The Bureau sought comment on its proposed approach to this data point.

Comments Received

The Bureau received comments on its proposed application method data point from a number of banks, trade associations, and community groups. Several commenters supported the Bureau's proposal to require financial institutions to report data on application method; some noted that such data would facilitate fair lending enforcement and/or further the community development purpose of section 1071. A community group asserted that data on the application method would enable the comparison of application outcomes based on the application channel at specific institutions and could also help assess whether applicants are receiving comparable access to comparable credit across application channels. Another community group stated that data on application method would help shed light on the issue of whether newer, online lenders are more effective at reaching underserved populations and businesses. One commenter suggested the Bureau create more categories, particularly to distinguish email from web portal because an application received by email often reflects a more personal relationship than does an application submitted via web portal.

In contrast, several banks and trade associations opposed the proposed requirement to collect application method data and urged the Bureau to drop it from the final rule. A few commenters said that this data point was added “late” in the rulemaking process or without adequate public input.

Industry commenters explained that application method data are not currently collected nor recorded in the loan file. A bank stated that it would need to collect the data manually because it does not have a way to record or report the information and asserted that this data collection requirement would affect its ability to serve the credit needs of its community. Several other commenters noted that this data point is not a factor in the credit decision and argued that there is no information or insight that can be gleaned from it. Some commenters also questioned how the data point would provide value in fair lending analysis. One commenter suggested the data have limited value and that the Bureau's policy goals can be achieved by combining publicly available data with section 1071's statutory requirements; for example, collection of census tract data will indicate whether a loan was originated in a “credit desert,” thereby eliminating the need for the application method data point.

Some commenters asserted that the proposed waterfall approach was problematic and would introduce complexity into reporting application method data. These commenters explained that there are multiple interactions between the lender and the applicant throughout the application process and suggested that reporting application method using the proposed waterfall approach would require the financial institution to document each interaction with an applicant. They further said that could lead to a cumbersome process in trying to determine exactly how an application was received and could result in unintentional errors. One industry commenter stated that an application may start out as an email request, followed up by a phone call, and then be completed in person. This commenter suggested that there would be difficulty collecting the data accurately because the proposal did not allow for multiple methods of application, particularly because the definition of application is at the financial institution's discretion. A bank suggested that the Bureau drop the waterfall approach and allow financial institutions to designate the best way to determine application method. A group of trade associations likewise requested that the Bureau drop the waterfall approach, and instead have financial institutions report the application method where the ethnicity, race, and sex of the applicant's principal owners was requested. A few commenters suggested that the application method should be based only on the initial contact. Two of these commenters indicated that basing the application method on initial contact would provide clear requirements in the event that the applicant provides information via two methods: for example, when an applicant applies online but later provides information by telephone.

A group of trade associations noted that while the data point is about the means by which the application was submitted, the proposed commentary discusses when a financial institution meets with the applicant or communicates with the applicant by telephone. This commenter stated that the proposed commentary was confusing and did not provide clear guidance on compliance.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(a)(3) with a number of revisions to the associated commentary. Pursuant to its authority under ECOA section 704B(e)(2)(H), the Bureau believes that collecting data on application method would aid in fulfilling the purposes of section 1071, as explained below.

Initially, the Bureau believes that data on application method will improve the market's understanding of how applicants apply for credit. In addition, data on application method will support 1071's statutory purposes by, inter alia, providing additional context for the business and community development needs of particular geographic regions. For instance, application method may help data users 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.

In addition, the Bureau believes that collecting data on application method will aid in analysis of multiple data points collected and reported by financial institutions, including the ethnicity, race, and sex of applicants' principal owners. For example, 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 are reasonably designed to obtain a response, as required by § 1002.107(c).

The Bureau explained in the NPRM that having application method data would be useful in analyzing data reported under, and assessing compliance with, proposed § 1002.107(a)(20) related to collecting the ethnicity and race of principal owners via visual observation or surname in certain circumstances. However, as explained in the section-by-section analysis of § 1002.107(a)(19) below, the Bureau has removed the visual observation or surname requirement from this final rule. Consequently, the proposed waterfall approach is less relevant for assessing compliance with final § 1002.107(a)(19). In combination with the concerns expressed by commenters regarding compliance complexities, including the need to document multiple interactions between the financial institution and applicant, the Bureau has decided not to adopt the proposed waterfall approach for reporting application method.

The Bureau is thus adopting comments 107(a)(3)–1.i through .iv with revisions to reflect the removal of the waterfall. The Bureau believes these changes will also address a commenter's concern regarding potential confusion about the proposed commentary's treatment of meetings and other interactions with applicants. Relatedly, the Bureau is not finalizing proposed comment 107(a)(3)–2, which would have provided guidance on reporting for interactions with applicants both via mail and online under the waterfall approach.

In addition, the Bureau has added new guidance in comment 107(a)(3)–1 to clarify what a financial institution reports if it retains multiple versions of the application form. The Bureau has also made a few minor revisions in comments 107(a)(3)–1.i through .iv for clarity. Final comment 107(a)(3)–1 lists the options a financial institution reports for the means by which an applicant submitted the application. In final comment 107(a)(3)–1.i, the Bureau has clarified that the in-person application method applies, for example, to those applications submitted at a branch office, including applications hand delivered by an applicant. In final comment 107(a)(3)–1.ii, the Bureau has clarified that an application submitted via telephone call is reported as “telephone.” In final comment 107(a)(3)–1.iii, the Bureau has clarified that an application submitted via website, mobile application (commonly known as an app), fax transmission, or text-based electronic communication is also reported as “online.” The Bureau does not believe it is appropriate to distinguish between applications submitted by email and applications submitted through a web portal, on the basis that an application that is emailed reflects a more personal relationship, as suggested by a commenter. The Bureau believes that both application methods are appropriately reportable as “online” because they reflect an electronic communication. The Bureau notes that various electronic communication methods provided in final comment 107(a)(3)–1.iii can reflect a personal relationship. For example, an applicant may have begun communications with the financial institution through email, followed by text messages, and then submitted the application through the financial institution's website. All of these methods can potentially reflect a personal relationship.

The Bureau removed the hand delivery at a teller window example in comment 107(a)(3)–1.iv because, under the final rule, an application hand delivered by an applicant at a branch is reported as “in-person” pursuant to final comment 107(a)(3)–1.i. Regarding a suggestion from commenters that the Bureau use the method by which ethnicity, race, and sex of the principal owners are collected for reporting this data point, the Bureau does not believe that such an approach is necessary given that it is not finalizing its proposed requirement to collect principal owners' ethnicity and race via visual observation or surname in certain circumstances. In addition, the Bureau does not believe that application method should be based on initial contact, as suggested by a few commenters. As explained by commenters, there could be multiple interactions between the lender and applicant throughout the pre-application and application process. Thus, the initial interaction may not amount to an application submission because, for example, the initial contact was simply an inquiry. In light of commenters' concerns regarding the potential difficulties in identifying application method, the Bureau believes that its approach to final § 1002.107(a)(3), which is tied to an applicant submitting an application, is preferable to the suggestions made by commenters.

Regarding commenters' concerns about the utility of this data point, the Bureau believes that application method data will facilitate the fair lending and business and community development purposes of section 1071, as explained above. This information cannot be replicated by combining data points specifically enumerated in section 1071, such as census tract, with other publicly available data. Application method is not intended solely to identify “credit deserts,” as the commenter appeared to suggest, and although census tract information might provide information as to where the proceeds will be applied (or the location of the applicant's headquarters/main office, or another location), that does not necessarily indicate where (or how) the financial institution interacted with the applicant. With respect to comments stating that application method is not currently collected nor is it considered as part of the credit decision, the Bureau believes that removal of the proposed waterfall approach will make collecting this data easier than contemplated in the proposed rule.

Finally, this data point was introduced with sufficient time for the public to provide feedback and offer alternatives. The data point was suggested by small entity representatives during the SBREFA process and was included in the SBREFA Panel Report. It was also included in the proposed rule and the Bureau specifically sought—and obtained—comment on it. As noted, the Bureau has made changes as a result of that feedback.

107(a)(4) Application Recipient

Proposed Rule

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 information regarding how an application is received will enhance small business lending data and aid in fulfilling the purposes of section 1071.

The Bureau proposed § 1002.107(a)(4), which would have required 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 have clarified 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 sought comment on its proposed approach to this data point.

Comments Received

The Bureau received comments on the proposed application recipient data point from industry and community groups. A community group expressed its support, noting that in combination with the application method data point under proposed § 1002.107(a)(3), it would help stakeholders determine whether traditional banking or online lending is most effective in reaching underserved small businesses or whether the effectiveness of the lending model depends on local context and conditions. A trade association also expressed its support, stating that the information can help data users understand the relationship between lender and applicant. This commenter further noted that recipient data would provide context for other collected and reported data and also improve transparency around when and whether an intermediary is considered a financial institution for the purposes of this data collection. In addition, a CDFI lender stated its general support of the Bureau's proposal to collect application recipient data.

In contrast, a number of banks and trade associations opposed the Bureau's proposal to collect application recipient data for various reasons. One trade association raised a concern that the application recipient data point was not included in the SBREFA Outline and, along with several other industry commenters, pointed out it is not one of the data points expressly enumerated in ECOA section 704B(e)(2). Several industry commenters stated that the data are not currently collected and a few of these commenters further stated that such data are not used or considered in the underwriting decision. Several industry commenters argued that the data point is burdensome and two banks stated they would need to collect the data manually because their systems are not equipped to collect the data. Other industry commenters questioned the value of the data point or how it fulfills the statutory purposes of section 1071. One industry commenter stated it is not dispositive of fair lending violations. Two banks urged the Bureau to drop the data point from the final rule or provide an exemption for certain institutions. One of these banks urged the Bureau to drop the data point from the final rule because it does not have affiliates nor does it accept applications indirectly and thus would not provide any data. The other bank commented that community banks should be exempt if they do not use actual third parties, but instead use a third-party online application system within the bank's firewall, and suggested that the only reason this data point should apply is if a bank is truly working with a third party, not a vendor who helps manage online tools. A trade association urged the Bureau to eliminate the application recipient data point from the final rule until a later determination can be made regarding its necessity.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(a)(4) and related commentary with a small modification for clarity. Final § 1002.107(a)(4) requires the financial institution to 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. Final comment 107(a)(4)–1 explains that if a financial institution is reporting actions taken by its agent consistent with comment 109(a)(3)–3, then the agent is considered the financial institution for the purposes of § 1002.107(a)(4). The comment also provides an example. The Bureau believes data on application recipient will facilitate fair lending analysis and enable a better understanding of business and community development needs. Pursuant to ECOA section 704B(e)(2)(H), the Bureau believes that collecting data on application recipient will aid in fulfilling the purposes of section 1071.

Regarding commenters' concerns that application recipient data are not currently collected nor used in underwriting decisions, the Bureau anticipates that financial institutions know and track how they receive applications for small business loans. The Bureau does not believe it would be difficult to track this information, even if the financial institution does not currently collect the information.

With respect to the comments received that question how application recipient data fulfill the purposes of section 1071, the Bureau believes that collecting data on application recipient, in combination with application method, as discussed above, will improve the market's understanding of how small businesses interact with financial institutions when applying for credit which, in turn, will facilitate fair lending analysis, including the identification of risks in small business lending. Regarding the comment that application recipient data are not dispositive of fair lending violations, the Bureau agrees that such data would not be dispositive of a violation on their own, but believes data on application recipient can be used in combination with other data points or information to provide a more robust analysis. With respect to promoting the business and community development purposes of section 1071, the Bureau believes that data on application recipient will 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, to the extent applicant preferences shift from in-person to online interactions). In addition, application recipient data may assist with an understanding of the business and community development needs of an area or applicant. For example, such data may help data users understand whether financial institutions making credit decisions are directly interacting with the applicant and/or generally operate in the same community as the applicant. Moreover, data on application recipient will allow the Bureau and data users to better understand the relationship between the covered financial institution and the applicant in the context of certain other data collected and reported under this final rule.

The Bureau is not removing the application recipient data point from the final rule or providing an exemption, as suggested by some commenters, for financial institutions that do not have affiliates, do not accept applications indirectly, and/or do not use third parties. Some financial institutions employ a wide variety of lending models in extending credit to small businesses. They may receive applications for credit directly from the applicant and 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 applicant at all during the application process. Information regarding whether the applicant submitted the application directly to the financial institution is necessary to further the purposes of section 1071, including by improving the market's understanding of how small businesses interact with financial institutions when applying for credit and whether the financial institution is operating in the same community as the small business. This is true even if a particular financial institution does not accept applications indirectly or does not use third parties, and reporting of this data point should be simple for financial institutions in that situation.

Finally, this data point was introduced with sufficient time for the public to provide feedback and offer alternatives. It was also included in the proposed rule and the Bureau specifically sought—and obtained—comment on it. Given the wide variety of lending models financial institutions currently use when extending credit to small businesses, the Bureau believes it is timely and appropriate to include this data point in this final rule.

107(a)(5) Credit Type

Proposed Rule

Section 1071 requires financial institutions to collect and report “the type and purpose of the loan or other credit being applied for.” (The credit purpose data point is discussed in the section-by-section analysis of § 1002.107(a)(6) immediately below.) 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. Section 1071 provides no additional information or details regarding what aspects of credit type should be collected and reported.

The Bureau proposed 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 was consistent with the approach presented in the SBREFA Outline, and would have required the financial institution to choose the credit product and guarantee(s) from a specified list. (These lists were provided in the commentary accompanying proposed § 1002.107(a)(5).) The lists included choices for “Other” and “Not provided by applicant and otherwise undetermined,” as appropriate, to facilitate compliance.

The Bureau sought 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 subcategory the Bureau proposed to include in the credit type data point was the credit product ( i.e., a commonly understood category of small business lending like term loans or lines of credit) which the Bureau considered to be an integral part of the statutory requirement to collect credit type.

Proposed comment 107(a)(5)–1 would have presented 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 have explained that a financial institution would comply with § 1002.107(a)(5)(i) by selecting the credit product requested from the list provided in the comment. It would also have explained that if an applicant requests more than one credit product, the financial institution reports each credit product requested as a separate application. Proposed comment 107(a)(5)–1 would have also explained that if the credit product for an application does not appear on the list of products provided, the financial institution would select “other” as the credit product and report the specific product via free-form text.

Proposed comment 107(a)(5)–2 would have explained that, pursuant to proposed § 1002.107(c)(1), a financial institution would be required to maintain procedures reasonably designed to collect applicant-provided data, which includes credit product. However, if a financial institution was nonetheless unable to collect or otherwise determine credit product information because the applicant did not indicate what credit product it sought and the application was denied, withdrawn, or closed for incompleteness before a credit product was identified, the proposed comment would have explained that the financial institution would report that the credit product was “not provided by applicant and otherwise undetermined.”

Proposed comment 107(a)(5)–3 would have explained how a financial institution would report a transaction that involves a counteroffer. The comment would have stated 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 would report 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 would report the disposition of the application based on the credit product that was offered, and would not report the original credit product applied for. In addition, proposed comment 107(a)(5)–6 would have explained when “other sales-based financing transaction” would be used for reporting.

The Bureau noted that, under its proposal, line increases would be reportable so that the small business lending market could be tracked accurately. See the section-by-section analysis of § 1002.103(a) above for additional details. However, the Bureau did not propose that line increases be included as a separate item in the credit product list.

The Bureau sought comment on its proposed approach to this subcategory, including the appropriateness and usefulness of the products included in the list, whether there were other products that should be added, and the proposed treatment of counteroffers. The Bureau also sought 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 proposed to include in the credit type data point was guarantee. Proposed comment 107(a)(5)–4 would have presented the instructions for collecting and reporting type of guarantee and the proposed list of guarantees from which financial institutions would select. Proposed comment 107(a)(5)–4 would also have explained 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.

Proposed comment 107(a)(5)–4 would have also explained that the financial institution may select, if applicable, up to a maximum of five guarantees for a single application or transaction. Small business credit may have more than one guarantee, such as an SBA guarantee and a personal guarantee, and the Bureau believed that more complete information could be collected by requiring as many as five to be reported.

Proposed comment 107(a)(5)–4 would have also explained 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 believed that allowing financial institutions to choose “other” when a guarantee for the application does not appear on the provided list would 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 have provided that if no guarantee is obtained or would have been obtained if the covered credit transaction were originated, the financial institution would select “no guarantee.” Because a small business credit transaction does not always involve use of a guarantee, the Bureau did not propose to include “not provided by applicant and otherwise undetermined” as an option. If no guarantee was identified for an application, the financial institution would report “no guarantee.”

The Bureau sought comment on its proposed approach to this subcategory, including the appropriateness and usefulness of the items listed, and whether there are other guarantees that should be added. The Bureau also sought comment on whether five is the appropriate upper limit for reporting guarantees.

Loan term. The third subcategory the Bureau proposed to include in the credit type data point was the loan term. Proposed comment 107(a)(5)–5 would have presented the instructions for collecting and reporting loan term. Specifically, it would have explained 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 have further explained how to measure the loan term and the possible use of rounding.

Proposed comment 107(a)(5)–5 would have also made clear that if a credit product, such as a credit card, does not have a loan term, the financial institution would report loan term as “not applicable.” The financial institution would also report “not applicable” if the application is denied, withdrawn, or determined to be incomplete before a loan term has been identified.

The Bureau sought comment on its proposed approach to this subcategory.

Comments Received

The Bureau received comments on its proposed approach to the credit type data point from a number of banks, community-oriented lenders, trade associations, community groups, and others.

Several commenters, including community-oriented lenders, community groups, a trade association, and a business advocacy group, supported the credit type data point as proposed, though some suggested small changes to the three individual subcategories discussed below. One commenter stated that to avoid the pitfalls that limited the use of HMDA data for spotting predatory trends in mortgages, the Bureau must collect sufficiently granular data on applicants and credit terms, including credit type. That commenter further stated that this information is critical because discrimination is not just evidenced in loan denials, but also less favorable credit terms. A community group stated that the information collected for the credit type data point would allow for more effective analysis than the current CRA small business information. A trade association stated that despite the added complexity of requiring three “data points” for the one listed in the statute, the Bureau has accounted for and addressed some of the concerns that community banks have raised related to credit type. That commenter went on to state its approval of the simple reporting of counteroffers and the ability to mark fields as “not provided by applicant” in the case of incomplete applications. Finally, a lender stated that it already collects the credit type information for the CDFI Fund.

Only one commenter opposed the credit type data point as a whole, stating that credit type and other data points would be a waste of time and efficiency.

Credit product. Two community groups and an auto finance trade association expressed support for the product list the Bureau proposed. The community groups stated that the list was nuanced and would provide useful differentiation between products. One explained that being able to determine which products were accessed could help in understanding bias in the credit market more accurately than CRA data currently allows for. An auto finance trade association specifically expressed support for the inclusion of “other” and “unknown” to facilitate compliance.

One commenter stressed the importance of providing detail in distinguishing credit products, and several commenters requested changes to the credit products list. A joint letter from community groups and business advocacy groups stated that there might be value in separating out mortgages, auto loans and equipment financing as discrete secured loan types but treating all other term loan applications together, rather than treating secured term loans as one category and unsecured term loans as another. A community group asked that refinances and renewals be added to the product list, stating that this information would help demonstrate community credit needs. That commenter went on to state that listing refinances in the credit purpose data point, as proposed, would be confusing, and that the Bureau should look at the ways refinances are reported under HMDA and CRA. Several minority business advocacy groups, along with a joint letter from community groups, community oriented lenders, and business advocacy groups, responded to the Bureau's request for comment by encouraging the Bureau to include “overdraft line of credit” in the list of credit products. These commenters stated that overdraft can contain hidden costs, so having a way to monitor lenders who provide it could be useful.. A trade association opposed the inclusion of overdraft line of credit in the credit products list, though it did not provide a reason. Several community groups commented that the Bureau should require reporting of collateral requirements and value, instead of simply requiring “secured” and “unsecured” for items in the credit product list. One of these commenters suggested that collateral info would shed light on underwriting changes and approaches during various economic conditions, allow stakeholders to understand why pricing might be lower on some loans and the risk that some loans might pose to borrowers.

A joint letter from community and business advocacy groups objected to the requirement to report each credit product requested as a separate application, stating that this would seem to require the lender to report each credit type requested as a separate application even when the applicant is seeking only one transaction but is open to alternative structures, and even though there would be only one action taken and one set of terms.

Type of guarantee. Several community groups expressed support for including guarantees as part of the credit type data point. These commenters stated that data on government guarantee programs would allow for better analysis of their usage, including whether minority and women owned businesses are being steered to these loans. One of these commenters stated that requiring reporting on all types of guarantees would facilitate analysis of whether minority and women owned businesses were receiving more costly or onerous credit. That commenter also stated that personal guarantees can at times be abusive, and reporting of those would allow better monitoring of this issue. Although it did not specifically express support for requiring reporting of guarantees, a trade association for auto finance lenders stated that its members will have this information for reporting.

Two industry commenters objected to the collection of guarantees as part of the credit type data point on the grounds that the statute does not require reporting of guarantees and asking that the credit type data point be limited to credit product and loan term. Those commenters, and several others who did not object to the general guarantee reporting requirement, were concerned in particular about the requirement to report what guarantees would have been obtained if the transaction had been originated. Some commenters stated that such a requirement extends into mere speculation, and would undermine the accuracy, reliability, and consistency of the data. Another commenter stated that it would not be possible to report what guarantees would have been obtained, and joint letter from community groups and business advocacy groups stated that the requirement could be problematic in the case of a declined application because the lender would be speculating as to potential guarantees, such as personal guarantees, from owners or non-owners. That comment went on to recommend that the Bureau either limit the reporting of this field to offers and counteroffers that are made ( i.e., allow financial institutions to report type of guarantee as “not applicable” for declined applications, as is permitted with respect to the loan term and loan pricing data fields) or, for declined applications, require reporting only if the requested guarantee were a government or programmatic guarantee (such as SBA, USDA or some other third-party guarantee program).

A community group and two CDFI lenders requested that the list of guarantees be changed in certain ways. The community group stated that the data should distinguish whether the guarantee is offered by the natural person(s) owning the business or the business itself, because it matters whether a creditor can seize assets of a person or the business. One of the CDFI lenders requested that the guarantee categories be broken down further to detail collateral coverage, which is often the deciding factor on approval or denial, and because people of color own homes (and amass wealth) at much lower rates than whites. That commenter went on to suggest that these details could shed light on the credit needs of minority small business owners and whether financial institutions are applying collateral requirements equitably. The other lender requested that State guarantee and local guarantee be separated on the list, rather than the combined “state or local guarantee” that was proposed. That commenter stated that differentiating between the performance of these two levels of government would be critical for understanding the focus of future reforms or capital flows through these entities. The commenter also provided statistics suggesting that conflating State and local guarantees would not be as informative as separating them.

Loan term. A community group and a community-oriented lender stated their support for the proposed loan term provision. The community group stated that loan term length influences pricing and other terms and conditions, and would help in explaining differences in these features. That commenter also suggested that loan term should be straightforward to report for lenders. In addition, a national auto finance trade association stated that its members would have this information to report.

A number of banks and a trade association objected to the proposal to have the loan term measured from the first payment period rather than the date of origination. These commenters stated that they do not measure loan term in this way, and having to do so for reporting would cause unnecessary and significant compliance difficulties. They asked to be able to measure loan term from the date of origination of the credit. Another bank objected to the reporting of loan term for applications, stating that applicants seldom make an application that specifies the desired loan term.

Although the proposed rule did not discuss how or whether merchant cash advance providers would report loan term, the Bureau did seek comment on proposed § 1002.107(a)(12)(v) and its commentary, the pricing provision for merchant cash advances, including whether to require additional pricing information for merchant cash advances, and whether merchant cash advances could be structured in ways that evade the proposed reporting requirement. Two commenters urged the Bureau to make clear that merchant cash advance providers must report loan term, and must not use the proposed rule's provision stating that “not applicable” could be reported for a product that has no loan term. These commenters discussed the importance of loan term in comparing different credit pricing and stated that merchant cash advances are sometimes abusive and are used disproportionately by minority businesses. These commenters also stated that loan term can be readily ascertained for merchant cash advances and they described different methods for doing so. One method suggested was that when a merchant cash advance is paid off before reporting, the provider should report the actual length of time to repayment. In addition, they suggested that for a partially paid merchant cash advance the provider could project the amount of time to repayment based on the amount already paid. One of these commenters, a cross-sector group of lenders, community groups, and small business advocates, stated that merchant cash advance providers establish an estimated loan term when they underwrite an advance, and that most merchant cash advance contracts have an estimated payment amount.

Final Rule

The Bureau is finalizing § 1002.107(a)(5) certain changes to facilitate compliance and enhance the quality and usefulness of the data reported. Final § 1002.107(a)(5) requires 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.

The Bureau believes that it is reasonable to interpret the statutory term “credit type” to comprise the three required subcategories, 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 will 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 is sufficiently flexible when they do not), so the Bureau does not believe there is anything in this approach that will 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 statutory term “type . . . of the loan” is ambiguous, and the Bureau reasonably interprets the term to include the credit product, any guarantee obtained, and the term of a 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 herein, the Bureau has also determined that the subcategories of credit product (including collateral), guarantee type, and loan term will aid in fulfilling those purposes.

Credit product. The Bureau is finalizing the credit product subcategory with certain changes to the associated commentary to facilitate compliance and enhance the quality and usefulness of the data reported. Final § 1002.107(a)(5)(i) requires financial institutions to compile and maintain data on the credit product applied for or originated. The Bureau continues to consider credit product to be an integral part of the statutory requirement to collect credit type. The Bureau believes information about the various products sought by applicants will 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 subcategory will help data users to avoid inaccurate interpretations of 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, will not be operationally difficult to report once a financial institution's section 1071 compliance system is set up.

Final comment 107(a)(5)–1 presents the instructions for collecting and reporting credit product and the list of credit products from which financial institutions will select. Comment 107(a)(5)–1 explains that a financial institution complies with § 1002.107(a)(5)(i) by selecting the credit product applied for or originated from the list provided in the comment. The Bureau believes that the list of credit products provided in final comment 107(a)(5)–1 aligns with the most common types of credit products in small business lending. Final comment 107(a)(5)–1 also explains 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 will facilitate compliance. In addition, collecting this information on “other” credit products will assist the Bureau in tracking product trends and key developments in the small business lending market, which the Bureau can use to inform any future iterations of the list.

Comment 107(a)(5)–1 also explains that if an applicant requests more than one credit product at the same time, 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 will yield more complete and useful data, and that a financial institution will not experience operational difficulties in copying the relevant information, identical for most data points, to separate lines in the small business lending application register. However, the Bureau has changed the language regarding this requirement from the proposed rule, in order to clarify that when the applicant is seeking only one transaction but is open to alternative product types, the financial institution reports only one application. Comment 107(a)(5)–1 now includes instructions on how to report credit product when the applicant only requests a single covered credit transaction, but has not decided which particular product to request. The Bureau believes that this new language will facilitate compliance and lead to the collection of more accurate data. The issue of reporting requests for multiple covered credit transactions at one time is discussed more fully in the section-by-section analysis of § 1002.103(a) above.

As explained above, many commenters suggested changes to the list of products in comment 107(a)(5)–1. In regard to the requests to separate out mortgages, auto loans and equipment financing as discrete secured loan types, to include additional information about collateral, and to make “refinancing” a credit product rather than a credit purpose, the Bureau believes that its credit product taxonomy presents a clear, uncomplicated framework using the basic forms of credit extended to small businesses. Including types of collateral and different refinancings as part of credit products would complicate the taxonomy and introduce categorization difficulties, for example with partial refinancings. Under the final rule, these types of credit will be reported using the credit product applied for or originated, from the list in comment 107(a)(5)–1, and the extra information suggested may or may not be appropriately included in the credit purpose data point under § 1002.107(a)(6), depending on the situation. Similarly, the Bureau believes that the overdraft aspect of overdraft lines of credit will best be reported using the credit purpose “overdraft,” and that the credit product will then be reported as a line of credit, secured or unsecured. The Bureau believes that this arrangement will help preserve the uncomplicated framework of the credit products list. See the section-by-section analysis of § 1002.107(a)(6) below for further discussion.

As a result of further analysis and consideration, the Bureau has made one change from the proposal to the final credit products list in comment 107(a)(5)–1. The proposed “credit card account” product has now been separated into “credit card account, not private-label,” and “private-label credit card account.” The Bureau believes that private-label credit cards form a distinct and important market segment that operates differently from other credit cards, and this distinction will facilitate robust data analysis and better further the purposes of section 1071. The Bureau also believes that financial institutions will have the information needed for reporting these different types of accounts readily available, and so separating the two types will not cause operational difficulty. In addition to the change in the credit product list in comment 107(a)(5)–1, the Bureau has added new comments 107(a)(5)–2 and –3 to explain the difference between these card products and facilitate compliance. Final comment 107(a)(5)–2 provides a definition of credit card accounts that are not private-label and includes instructions on reporting these products. Final comment 107(a)(5)–3 provides a definition of private-label credit card accounts and includes instructions on reporting these products.

The Bureau is also finalizing comments 107(a)(5)–4, –5 (which were numbered as comments 107(a)(5)–2 and –3 in the proposal) and comment 107(a)(5)–6 as proposed. Final comment 107(a)(5)–4 describes the situation in which a financial institution reports that the credit product was “not provided by applicant and otherwise undetermined.” The Bureau believes that permitting this response will facilitate compliance and enhance the quality of data collected. As discussed above, commenters supported the flexibility afforded by this kind of response.

Final comment 107(a)(5)–5 provides instructions on how a financial institution reports a transaction that involves a counteroffer. The comment states 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 § 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 treatment of counteroffers more generally, see the section-by-section analysis of § 1002.107(a)(9) below.

Final comment 107(a)(5)–6 explains that 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, and provides a cross reference to comment 104(b)–1. The Bureau believes that this explanation will facilitate reporting of applications involving this important market segment.

Type of guarantee. The Bureau is finalizing the requirement to report guarantees as a subcategory of the credit type data point with changes to enhance the quality of the data collected and facilitate compliance. The final rule requires a financial institution 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 were originated.

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 can 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 subcategory 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. The Bureau further believes that information on the distribution of government loan guarantees (such as those provided in SBA programs) across different geographic areas and applicant groups will 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 the Bureau does not believe it will be operationally difficult to report once a financial institution's 1071 compliance system is set up.

Final comment 107(a)(5)–7 (which was numbered as comment 107(a)(5)–4 in the proposal) presents the instructions for collecting and reporting type of guarantee and the list of guarantees from which financial institutions will select. The Bureau believes the list of guarantee types provided in comment 107(a)(5)–7 aligns with the most common types of guarantees used in small business lending. Final comment 107(a)(5)–7 also explains 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 agrees with the commenters who suggested that clarity was needed on how to report guarantee type when the covered credit transaction is not originated. Consequently, comment 107(a)(5)–7 now states that if an application is denied, withdrawn, or closed for incompleteness before any guarantee has been identified, the financial institution selects “no guarantee.” The Bureau believes that this reporting option will facilitate compliance and result in the collection of more reliable data. The Bureau also agrees that separating State and local guarantees, so that they can be tracked individually, will enhance the quality of the data collected. Comment 107(a)(5)–7 now includes separate items for these guarantee types, and states that the financial institution chooses State government guarantee or local government guarantee, as applicable, based on the entity directly administering the program, not the source of funding. The Bureau believes that this instruction will facilitate compliance and enhance the quality of the data collected. The Bureau also believes that differentiating between State and local guarantees will not cause operational difficulty for reporters because the financial institution will have the information in the loan file.

The Bureau understands that there may be some value in collecting the additional information suggested by commenters on whether a natural person or business makes a guarantee and the nature of the collateral backing a guarantee. However, the Bureau believes that these items will increase the complexity and operational difficulty of compliance in reporting the type of guarantee and has not included them in the final rule.

Loan term. The Bureau is finalizing the requirement to report loan term as part of the credit type data point with certain changes to the associated commentary to facilitate compliance and enhance the quality of the data collected. Final § 1002.107(a)(5)(iii) requires a financial institution to report the length of the loan term, in months, if applicable.

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 subcategory within credit type. As with other elements of the credit type data point, loan term information will allow data users to reduce inaccurate conclusions or misinterpretations of the 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.

Final comment 107(a)(5)–8 (which was numbered as comment 107(a)(5)–5 in the proposal) presents the instructions for collecting and reporting loan term. Specifically, it explains that 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, and that the loan term is the number of months after which the legal obligation will mature or terminate. In the proposed rule, this comment included language that would have required financial institutions to measure the loan term in the way that loan terms are generally described in real property transactions. However, the Bureau agrees with those commenters who stated that such a provision would create compliance difficulties. Although the final comment continues to allow the loan term to be measured for real property transactions in the way the Bureau proposed, it makes clear that loan term for small business credit is generally measured from the date of origination and should be reported that way.

Final comment 107(a)(5)–8 also makes 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 Bureau believes that permitting the use of “not applicable” in these situations will facilitate compliance and aid in the collection of appropriate data. However, the Bureau does not consider products that have an estimated loan term, such as certain merchant cash advances and other sales-based financing transactions, as products that do not have a loan term. The Bureau agrees with those commenters who suggested that merchant cash advance providers should report loan term so that appropriate comparisons can be made with other products. Consequently, comment 107(a)(5)–8 now provides that for merchant cash advances and other sales-based financing transactions, the financial institution complies with § 1002.107(a)(5)(iii) by reporting the loan term, if any, that the financial institution estimated, specified, or disclosed in processing or underwriting the application or transaction. The Bureau notes that loan term for a merchant cash advance or other sales-based financing transaction can also be the estimated loan term disclosed in a State or locally required disclosure, if applicable. The comment also explains that if more than one loan term is estimated, specified, or disclosed, the financial institution reports the one it considers to be the most accurate, in its discretion. The Bureau believes that these instructions will enhance the quality of the data collected and facilitate compliance by providing clear guidance on these providers' reporting responsibilities. The Bureau chose not to use the other loan term measurements that commenters suggested because they would likely have introduced significant operational difficulty. The Bureau believes that merchant cash advance and other sales-based financing providers will not have operational difficulty reporting an estimate that they already possess. If a merchant cash advance or other sales-based financing provider does not estimate, specify, or disclose a loan term as part of the processing or underwriting of the application or transaction, the provider may report that the loan term is “not applicable.”

The proposed rule's loan term comment would have also provided that the financial institution would report “not applicable” if the application is denied, withdrawn, or determined to be incomplete before a loan term has been identified. However, in order to facilitate compliance, enhance the quality of information collected, and for consistency with the other data points in the final rule, final comment 107(a)(5)–8 now provides that for a credit product that generally has a loan term, the financial institution reports “not provided by applicant and otherwise undetermined” if the application is denied, withdrawn, or determined to be incomplete before a loan term has been identified. The Bureau believes that the availability of this response will facilitate the reporting of the loan term subcategory for applications in these situations.

107(a)(6) Credit Purpose

Proposed Rule

Section 1071 requires financial institutions to collect and report “the type and purpose of the loan or other credit being applied for.” (The credit type data point is discussed in the section-by-section analysis of § 1002.107(a)(5) immediately above.)

The Bureau proposed in § 1002.107(a)(6) to require that financial institutions collect and report the purpose or purposes of the credit applied for or originated. Proposed comment 107(a)(6)–1 would have presented instructions for collecting and reporting credit purpose and would have provided the proposed list of credit purposes from which financial institutions would select.

The proposed list of credit purposes was similar to the list in the SBREFA Outline, with certain adjustments. First, the items on the SBREFA list that described types of collateral, such as commercial real estate, were updated to more clearly reflect that the financial institution would be collecting and reporting the purpose of the loan, and not the form of collateral, though the form of collateral might be referred to in describing that purpose. In addition, the proposed listed purposes involving real property would have differentiated between dwelling and non-dwelling real property. The Bureau believed that this distinction would help in collecting more precise and useful data. To facilitate compliance the Bureau proposed to include “not applicable” in 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 have also explained the use of “not applicable” as a response.

Proposed comment 107(a)(6)–2 would have explained that if the applicant indicated or the financial institution was otherwise aware of more than one purpose for the credit applied for or originated, the financial institution would have reported those purposes, up to a maximum of three, using the list provided, in any order it chose.

Proposed comment 107(a)(6)–3 would have explained that if a purpose of the covered credit transaction did not appear on the list of purposes provided, the financial institution would report “other” as the credit purpose and report the purpose as free-form text. For efficiency and to facilitate compliance, proposed comment 107(a)(6)–3 would have also explained that if the application had more than one “other” purpose, the financial institution would choose the most significant “other” purpose, in its discretion, and would report that “other” purpose. The comment would have then explained that a financial institution would report a maximum of three credit purposes, including any “other” purpose reported.

Proposed comment 107(a)(6)–4 would have explained that, pursuant to proposed § 1002.107(c)(1), a financial institution would maintain procedures reasonably designed to collect applicant-provided information, which would include credit purpose. However, if a financial institution was nonetheless unable to collect or determine credit purpose information, the financial institution would have reported that the credit purpose was “not provided by applicant and otherwise undetermined.”

In order to facilitate compliance, the Bureau also proposed comments 107(a)(6)–6 and –7. Proposed comment 107(a)(6)–6 would have clarified that, as explained in proposed comment 104(b)–4, subpart B did not apply to an extension of credit that was secured by 1–4 individual dwelling units that the applicant or one or more of the applicant's principal owners did not, or would not, occupy. Proposed comment 107(a)(6)–7 would have clarified 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 have further explained 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 have clarified that if an applicant chose a purpose or purposes that were similar to purposes on the list provided, but used different language, the financial institution would report the purpose or purposes from the list provided.

The Bureau sought comment on its proposed approach to the credit purpose data point. In addition, the Bureau sought comment on whether there were any purposes that should be added to or modified on its proposed list. In particular, the Bureau sought comment on the potential usefulness of including “agricultural credit” and “overdraft line of credit” in the credit purposes list. Finally, the Bureau requested comment on whether further explanations or instructions with respect to this data point would facilitate compliance.

Comments Received

The Bureau received comments on its proposed approach to the credit purpose data point from a number of lenders, trade associations, and community groups, along with a minority business advocacy group. Several community groups expressed support for the credit purpose data point as proposed by the Bureau, and a CDFI lender explained that it already collects this information. A community group stated that the proposal accurately captured the wide variety of credit purposes and then expressed specific support for distinguishing dwellings from non-dwellings, allowing reporting of three credit purposes, and inclusion of the “other” category with a free-form text box. In addition, this commenter suggested that the proposed method for credit purpose collection could work well with the CRA.

A trade association representing community banks also supported the proposal for credit purpose, especially the flexibility provided by the “not applicable” and “not provided by applicant and otherwise undetermined” options, and the provision allowing a financial institution to report the credit purposes in any order it chooses, when the institution is aware of more than one purpose. That commenter said that these accommodations would facilitate compliance while still achieving the policy goals of the law. A trade association representing auto finance lenders also stated support for the flexibility provided by the “not applicable” and “not provided by applicant and otherwise undetermined” options. Two banks opposed the credit purpose proposal, explaining that it would require extensive changes and burdensome ongoing operations, and that the interplay with other regulatory requirements was unclear. One of these commenters also questioned the usefulness of the data collected. However, neither commenter suggested alternative ways to implement the statutorily required credit purpose data point.

Several commenters asked that the Bureau clarify certain aspects of the credit purpose proposal. Two industry commenters requested clarification of the circumstances when institutions should use “not provided by applicant and otherwise undetermined” as opposed to “not applicable.” Several industry commenters requested guidance on when to use “owner-occupied” versus “non-owner occupied” for non-dwelling real property. Another asked about how to report when the loan is mixed-use (business and consumer purpose). A joint letter from community groups and community oriented lenders requested that the Bureau clarify that the category “Working capital (includes inventory or floor planning)” also includes salaries, rents, and other daily expenses. A credit union trade association suggested that the Bureau clarify how transactions should be reported when made directly to a sole proprietor, not to the business directly, explaining that credit unions may find it confusing to report a loan purpose that implies that the business itself is the recipient.

Several commenters requested more substantial changes in the proposed credit purpose data point. Two joint comment letters, each representing multiple community groups and other entities, requested that the Bureau require more granular reporting in certain situations, especially with regard to real property loans. These comments suggested collecting real property loan data on rental purpose, whether buildings are mixed-use, the number and type of units in buildings, as well as a way to easily connect to a HMDA record for any loan that is reported under both regimes. One of these comments asked that the Bureau make it easier to determine if a capital expense loan is used to maintain a business or expand it. Another community group requested that the Bureau disaggregate the purchase-construction-repair purpose from refinancing for things like real estate, vehicles, and equipment, perhaps by adding a separate data point. Another requested that refinancings (along with renewals) should be listed as a credit product in the credit type data point, rather than as a credit purpose. That same commenter requested that financial institutions not be allowed to use their own list of purposes, as proposed, and suggested that the Bureau consider providing a sample application form, which would include the rule's list of credit purposes, to facilitate data collection.

Several industry commenters responded to the Bureau's request for comment on including “agricultural credit” as a credit purpose. These commenters mostly requested that new purposes specifically geared to agricultural lending be included, though they did not offer any examples of such purposes. The commenters emphasized that agricultural lending is different from other business lending and suggested that choosing from the credit purposes listed would be difficult for this market. A community group stated that it might be confusing to list agricultural credit as a credit purpose as the credit product data point would collect that they are farm loans.

Several community groups and a minority business advocacy group responded to the Bureau's request for comment on whether the final rule should include “Overdraft line of credit” as a credit purpose. These commenters supported inclusion of overdraft as a purpose, stating that it should be monitored for potential abuses, especially abuses in communities of color. No industry commenters discussed the possible inclusion of overdraft lines of credit as a credit purpose.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(a)(6) and associated commentary with certain revisions for clarity, to improve the usefulness of the data collected, and to accommodate a new coverage exclusion for HMDA-reportable transactions. Final § 1002.107(a)(6) requires that financial institutions collect and report the purpose or purposes of the credit applied for or originated.

Final comment 107(a)(6)–1 provides instructions for collecting and reporting credit purpose and presents the list of credit purposes from which financial institutions will select. The final list of purposes is very similar to the proposed list but deletes two purposes that describe credit likely to be HMDA reportable, includes one additional purpose (“overdraft”) and makes minor edits to accommodate those changes and for clarity. The Bureau believes that the list of credit purposes provided in comment 107(a)(6)–1 appropriately aligns with the purposes of credit sought in the small business credit market.

Because the Bureau is adopting an exclusion for HMDA-reportable credit, the proposed purposes list's differentiation between dwelling and non-dwelling real property is no longer necessary. In addition, the purposes in the list that pertained to dwellings were very likely to be HMDA-reportable, and so have been removed in the final rule. See the section-by-section analysis of § 1002.104(b) above for further discussion of this exclusion.

The Bureau agrees with the commenter who suggested that “Working capital (includes inventory or floor planning)” will often also include salaries, rents, and other daily expenses. However, the final rule does not include these items in the credit purposes list description of working capital because the Bureau believes the term is already clear, and listing these items may cause confusion as to other working capital items that are not listed.

The Bureau has not added “Agricultural credit” or specific purposes associated with agricultural credit to the list of credit purposes in the final rule. First, although “farm loans” are not listed as a credit product in the credit type data point, the NAICS data point in final § 1002.107(a)(15) will make clear when the small business borrower is an agricultural business. In addition, other business types are not included in the credit purposes list and doing so with agriculture could cause confusion. As far as including specific agricultural purposes in the purposes list, the commenters who suggested this did not provide examples, and the Bureau did not propose such purposes. Going forward, the Bureau may learn of specific agricultural credit purposes from the “Other” free-form text box, and if appropriate, potentially add them to the rule later.

The Bureau agrees that overdraft should be separately identified as a credit purpose in the list in comment 107(a)(6)–1 in order to observe its use in the market. Rather than “Overdraft line of credit” as referenced in the proposal's preamble, the Bureau is using the term “Overdraft.” In order to facilitate compliance regarding overdraft as a credit purpose, the Bureau is adding new comment 107(a)(6)–8 to the final rule, which makes clear that when overdraft is an aspect of the covered credit transaction applied for or originated, the financial institution reports “Overdraft” as a purpose of the credit. The new comment also explains that the financial institution reports credit type pursuant to § 1002.107(a)(5)(i) as appropriate for the underlying covered credit transaction, such as “Line of credit—unsecured.” The Bureau does not believe that reporting overdraft as a credit purpose will create operational difficulties for financial institutions because the information will be readily apparent as an aspect of the credit. Finally, new comment 107(a)(6)–8 makes clear that providing occasional overdraft services as part of a deposit account offering would not be reported for the purpose of subpart B.

The Bureau is finalizing comments 107(a)(6)–2 through –5 with minor edits to accommodate the removal of purposes related to the exclusion for HMDA-reportable transactions and for clarity. Final comment 107(a)(6)–2 explains 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 reports those purposes, up to a maximum of three, using the list provided, in any order it chooses. Since applicants 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 credit purposes will provide useful data. The Bureau also believes that allowing financial institutions discretion as to the order of the credit purposes reported will facilitate compliance.

Final comment 107(a)(6)–3 explains that 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. The Bureau believes that allowing financial institutions to choose “other” when a credit purpose for the application did not appear on the provided list will facilitate compliance. In addition, the Bureau believes that collecting this information on “other” credit purposes will assist in monitoring trends in this area and key developments in the small business lending market, which the Bureau can use to inform any future changes to the list.

Final comment 107(a)(6)–4 makes clear that, pursuant to final § 1002.107(c)(1), a financial institution shall maintain procedures reasonably designed to collect applicant-provided data, which includes credit purpose. However, the comment further explains that 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.” The Bureau agrees with the industry commenters who stated that this provision would provide flexibility and believes that permitting use of this response will facilitate compliance and enhance the quality of data reported.

In order to facilitate compliance, final comment 107(a)(6)–5 explains that 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.” As with the “not provided by applicant and otherwise undetermined” purpose, the Bureau agrees with the industry commenters who felt that this provision would provide appropriate flexibility. The Bureau does not believe that there will be confusion about the situations for which “not provided by applicant and otherwise undetermined” (as explained in final comment 107(a)(6)–4) and “not applicable” (as explained in final comment 107(a)(6)–5) are appropriate to use. The commenters who suggested that such confusion might occur did not explain why the proposed language would not be sufficient.

Final comment 107(a)(6)–6 provides details on the collection of credit purposes by financial institutions. The comment states that, pursuant to § 1002.107(c)(1), a financial institution shall maintain procedures reasonably designed to collect applicant-provided data, including credit purpose. In addition, 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 credit 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. The Bureau believes that the explanations and instructions in the final commentary accompanying § 1002.107(a)(6) will reduce any confusion as to how a financial institution reports this data point when an application involves multiple credit purposes, and in other situations.

The Bureau believes that prohibiting financial institutions from using their own credit purpose lists, as one commenter suggested, would not be appropriate because the Bureau does not have sufficient information to create a definitively comprehensive credit purposes list and wishes to provide institutions the flexibility appropriate to their market segment. In regard to that commenter's suggestion that the Bureau provide a sample application form, this issue is discussed in the section-by-section analysis of appendix E below. In addition, the Bureau does not believe additional clarification regarding how to report credit purpose for business loans made to sole proprietors is necessary.

Because the Bureau is providing a complete exclusion for HMDA-reportable transactions in the final rule, the Bureau is not finalizing proposed comment 107(a)(6)–6, which would have provided a cross-reference to the partial exclusion for dwelling-secured credit in the proposed rule.

New comment 107(a)(6)–7 explains that real property is owner-occupied if any physical portion of the property is used by the owner for any activity, including storage. The Bureau adds this explanation in response to comments asking for clarity on this issue. The Bureau believes that the language provided clearly indicates the meaning of “owner-occupied” for reporting purposes and will facilitate compliance and help in the collection of uniform data.

In regard to the commenters that objected to the entire credit purpose data point as excessively burdensome and not providing useful information, the Bureau notes that this data point was specified by Congress in section 1071 as one that financial institutions must collect and report; these commenters did not suggest a different method of collection. The Bureau also believes, along with the national trade association representing small banks whose comment is described above, that the reporting accommodations included in the credit purpose provision will facilitate compliance while still achieving the policy goals of section 1071.

Although some additional useful information might be collected if the Bureau were to expand the credit purpose data point to include the more granular reporting requested by community groups, such changes would make the collection more difficult for financial institutions as well as potentially confusing for small business applicants; the Bureau does not believe that further granularity is necessary at this time, especially at the risk of obtaining potentially less accurate or complete data overall. In regard to making “refinancing” a credit product rather than a credit purpose as proposed, the Bureau believes that its credit product taxonomy presents a clear, uncomplicated framework using the basic forms of credit extended. Making refinancing a product would complicate the taxonomy and introduce categorization difficulties, for example with partial refinancings. As for including renewals, the section-by-section analysis of § 1002.103(b) above discusses this issue.

107(a)(7) Amount Applied For

Proposed Rule

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.” 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.

The Bureau proposed § 1002.107(a)(7) to require a financial institution to collect and report “the initial amount of credit or the initial credit limit requested by the applicant.” Proposed comment 107(a)(7)–1 would have explained 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 have stated 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 have instructed that if the applicant requests an amount as a range of numbers, the financial institution reports the midpoint of that range.

To address the situation where the financial institution requests an amount applied for but the applicant nonetheless does not provide one, proposed comment 107(a)(7)–2 would have explained 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 would have been required to report that the amount applied for is “not provided by applicant and otherwise undetermined.”

Proposed comment 107(a)(7)–3 would have provided instructions for reporting the amount applied for in regard to firm offers. Proposed comment 107(a)(7)–3 would have explained 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, proposed comment 107(a)(7)–3 would have explained that the amount applied for is the amount underwritten by the financial institution.

Proposed comment 107(a)(7)–4 would have explained 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 noted 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 have applied to such a situation.

The Bureau sought comment on its proposed approach to the amount applied for data point. The Bureau also requested 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 requested comment on potential methods for avoiding misinterpretations of disparities between the amount applied for and the amount approved or originated. Finally, the Bureau requested comment on its proposed approach to reporting when a range of numbers is requested.

Comments Received

The Bureau received comments from lenders, trade associations, community groups, and others regarding this proposed data point. Community groups and a CDFI lender supporting the Bureau's approach to the collection of the amount applied for data point. One commenter said that it works with minority farmers whose loans are approved for far less than what they originally applied for and that the data would give them information regarding lending practices involving minority farm businesses. Several commenters stated that amount applied for and amount approved or originated are key data for fair lending purposes. One said that Black-, Latino-, and Asian-owned businesses have been substantially less likely to receive the full small business loan amount requested than white-owned small businesses. Another commenter requested that the Bureau scrutinize lenders when the application and approval amounts are conspicuously close, especially if there is a disproportionate impact on women and minority-owned businesses, because some lenders may dissuade applicants from making a specific request and steer them to the considered underwriting amount that is lower than the financing need of the small business.

A community group noted that amounts should not be reported in ranges since the statute requires reporting of amounts and furthermore, that ranges are not useful for assessing whether lenders are responding adequately to credit needs. This community group also commented that with respect to line increases, it makes sense for the lender to report the additional amount instead of the additional and original amount because it is more precise in terms of being able to assess whether credit needs are being met.

Several industry commenters and a group of State banking regulators expressed concerns about collecting the data in light of the lending process where the “amount applied for” can fluctuate throughout the application stage. One trade association commented that financial institutions should not be required to report amounts stated before an application is made because applicants state a loan amount early on but that loan amount usually changes throughout the process for various reasons. Another stated that many business credit applications include offers, counteroffers, and negotiations. One commenter stated that even though the initial amount requested appears useful it does not reflect the true dynamic of the small business lending process. The commenter reasoned that it is not uncommon during the application process to see the actual loan amount fluctuate as the entrepreneur further refines their capital needs, and that makes tracking this type of information not particularly relevant or reflective of the process. A credit union trade association recommended that financial institutions have the discretion to report an “amount applied for” that is determined at a later stage, rather than at the first request of the applicant, because reporting the initial credit request could inaccurately represent the lending process. A group of state banking regulators commented that some applicants may not request an amount or may request a range, and some financial institutions will not require such information at the outset. They stated that mandating reporting of a requested loan amount would impose increased compliance burdens and has the potential to disrupt the relationship aspect of small business lending.

Two industry commenters requested the Bureau clarify how financial institutions should report the amount applied for when a firm offer of credit specifies a range of possible amounts, for example, amounts between $20,000 and $40,000. These commenters stated they believe such offers should be deemed not to specify an amount or limit and that institutions should be able to report the amount underwritten as the amount applied for. They reasoned that reporting the top of the range as the amount applied for in these circumstances could be misleading because many applicants likely will not qualify for amounts at the top of the range. A bank suggested that when an applicant indicates a range, each financial institution should be able to decide whether to report the low, midpoint, or high end of the range so long as it is consistent for the financial institution's entire small business lending application register.

Two business advocacy groups noted that uncertainty regarding key definitions could create compliance challenges and requested that the Bureau provide additional clarity as to the meaning of “applied for.” A bank stated that its systems do not have a way to collect and record this data point and that it would need to collect it manually, which would affect its ability to serve its customers and community.

The Bureau did not receive comments on how best to require reporting for situations involving multiple products or credit lines under a single credit limit or potential methods for avoiding disparities between amount applied for and amount originated or approved.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(a)(7) and associated commentary with revisions and an addition in the commentary for clarity. 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 Bureau believes its interpretation of “the amount of the credit or credit limit applied for” pursuant to ECOA section 704B(e)(2)(C) is reasonable and appropriate.

With respect to the commenter that indicated that some lenders may dissuade applicants from making a specific request and steer them to the considered underwriting amount, which may be lower than their financing needs, the Bureau believes that it is necessary to capture both the amount applied for and amount approved or originated to fulfill the statutory purposes of section 1071, including facilitating fair lending enforcement. The Bureau believes the amount applied for and the amount approved data points are necessary to identify potentially discriminatory practices, such as discouragement or steering, in the lending process. For example, greater differences between amount applied for and amount originated among protected groups could indicate a fair lending concern. The Bureau notes that if a financial institution were to seek to unduly influence or alter the amount requested by the applicant in order to avoid reporting it, such conduct would violate the requirement in final § 1002.107(c) to not discourage an applicant from responding to requests for applicant-provided data and to maintain procedures to collect such data at a time and in a manner that are reasonably designed to obtain a response.

Regarding commenters' concerns that the amount applied for can change throughout the lending process, the Bureau acknowledges 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. The Bureau acknowledges that this complexity could make this data point challenging for financial institutions to collect and report. Nonetheless, the statute requires that the amount applied for be reported, and the information is important for both of section 1071's statutory purposes. The Bureau is finalizing comment 107(a)(7)–1 with minor edits for clarification. Final comment 107(a)(7)–1 provides that the financial institution reports the initial amount of credit or the credit limit initially requested by the applicant at the application stage and is not required to report credit amounts or limits discussed before an application is made. The Bureau believes that this guidance will provide a flexible compliance regime that will accommodate different business practices. A financial institution will not be required to report amounts discussed before the application is made, which will accommodate preliminary informal interactions. Regarding the recommendation that financial institutions have the discretion to report an amount determined at a later stage rather than the initial request of the applicant, the Bureau notes that the statute requires the amount applied for to be reported even though a small business credit application process can be fluid. Therefore, a financial institution should report the initial request of the applicant if the lending process has already reached the application stage. In regard to ranges of amounts requested, the Bureau does not believe that permitting financial institutions to decide whether to report the low, midpoint, or high end of the range, as requested by a commenter, would yield data that will be comparable to the other data collected for this data point because different financial institutions will be applying different rules for what to report. The Bureau believes that more uniform information will be more useful and should not create extra difficulty for financial institutions to collect. Therefore, to facilitate compliance, final comment 107(a)(7)–1 provides that for amounts that were requested as a range of numbers, the financial institution reports the midpoint of the range. In addition, for clarity, the Bureau moved guidance on what to report if an applicant does not request a specific amount to final comment 107(a)(7)–2, as explained below.

With respect to the comment that an amount may not be initially required or that some applicants may not request an amount or may request a range, the Bureau understands that a specific amount may not be provided by the applicant and 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. Final comment 107(a)(7)–2 provides that in situations where the applicant does not request a specific amount at the application stage, but the financial institution underwrites the application for a specific amount, the financial institution reports the amount that was considered in underwriting. Final comment 107(a)(7)–2 also provides that if a particular type of credit product does not involve a specific amount requested, then the financial institution reports “not applicable.” The Bureau believes this method will aid compliance with section 1071 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. For clarity, the Bureau moved guidance regarding amounts that are otherwise undetermined that was addressed in proposed comment 107(a)(7)–2 to final comment 107(a)(7)–5, as explained below.

Regarding the request that the Bureau clarify how institutions should report the amount applied for when a firm offer of credit specifies a range of possible amounts, the Bureau added guidance in final comment 107(a)(7)–3 that addresses this situation. “Firm offers” involve solicitations to small businesses when they have been pre-approved for a term loan, line of credit, or credit card. The Bureau understands that financial institutions often provide an amount in such solicitations and 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. However, 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. Final comment 107(a)(7)–3 provides that when an applicant responds to a firm offer, a financial institution reports the amount applied for as the amount of the firm offer, unless the applicant requested a different amount. If, on the other hand, the firm offer did not contain a specified amount and the applicant did not request one, then the financial institution reports the amount applied for as the amount that was underwritten. The Bureau did not propose guidance that addresses what financial institutions report when a firm offer specifies a range of possible amounts. The Bureau agrees with the commenters that such offers should be treated similarly to those situations where a firm offer did not specify an amount. To address this scenario, final comment 107(a)(7)–3 states that if the firm offer specifies an amount or limit as a range of numbers 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 this guidance will aid compliance and yield useful data.

The Bureau is finalizing comment 107(a)(7)–4 as proposed. The comment explains 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 extended.

The Bureau added final comment 107(a)(7)–5 to address situations where the initial amount applied for cannot be determined. Specifically, the comment provides that under § 1002.107(c)(1), a financial institution shall maintain procedures reasonably designed to collect applicant-provided data, which includes the credit amount initially requested by the applicant (other than for products that do not involve a specific amount requested). However, the Bureau understands that there may be situations in which amount applied for was not collected and could not be otherwise determined. Thus, final comment 107(a)(7)–5 provides that if a financial institution is 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 this reporting flexibility will facilitate compliance by accommodating different business practices.

With respect to the commenter that indicated that its systems do not have a way to collect this data point, the Bureau believes that the data on the amount applied for will generally be available in the loan files and should not present particular difficulties in reporting. Regarding the request from commenters that the Bureau provide additional clarity as to the meaning of applied for, the commenters did not indicate specific issues in the amount applied for data point that require clarification. The Bureau believes it has addressed in this final rule the requests for clarity from other commenters as well as other clarifications the Bureau believes are appropriate.

107(a)(8) Amount Approved or Originated

Proposed Rule

Section 1071 requires financial institutions to collect and report “the amount of the credit transaction or the credit limit approved.”

Proposed § 1002.107(a)(8) would have required 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.

Proposed comment 107(a)(8)–1 would have provided general instructions for the amount approved or originated data point, explaining that a financial institution reports 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), would have reported as denied, withdrawn by the applicant, or incomplete, the financial institution would have reported that the amount approved or originated is “not applicable.”

Proposed comment 107(a)(8)–2 would have explained 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. Proposed comments 107(a)(8)–3 and –4 would have provided specific instructions for identifying and reporting the amount approved or originated for closed-end transactions, including refinancings.

Proposed comment 107(a)(8)–5 would have provided 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 have further explained 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 have provided a reference to proposed comment 107(a)(9)–2, which discusses the action taken data point in relation to counteroffers.

The Bureau sought comment on its proposed approach to the amount approved or originated data point. The Bureau also requested 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 requested comment on whether it would be useful and appropriate to require reporting of the amount approved as well as the amount originated for closed-end credit transactions.

Comments Received

The Bureau received comments on the amount approved or originated data point from lenders, trade associations, and community groups. Almost all of the comments received supported the Bureau's proposal. A bank and a trade association commented that the Bureau's proposal is a reasonable and appropriate means of implementing the statutory requirement. A community group and a CDFI lender highlighted the usefulness of the data for fair lending purposes, including identifying potentially discriminatory lending practices. The CDFI lender suggested that the data can help show how financial institutions compare across key metrics and reveal capital gaps in the market that lenders may be able to fill. Two commenters supported the proposal's requirement that data collection on amount approved or originated be required for transactions that are approved but not accepted, not just those that are originated. A trade association commented that different standards are appropriate for closed-end and open-end products, while a community group noted that it is appropriate to report the credit limit in cases of open-end credit. Another trade association emphasized the Bureau's proposal regarding counteroffers and that it appropriately allows for negotiations prevalent in small business lending. A community group requested that the Bureau not permit reporting of amounts in ranges, stating that the statute requires reporting of specific amounts and that ranges are not useful for assessing whether lenders are responding to credit needs adequately.

Two banks expressed concerns about the overall proposed requirement to collect data on amount approved or originated. One suggested that the data are meaningless because the majority of loan requests at a community bank are not submitted formally and in most cases the amount approved is what was requested. That bank also noted that it would be rare for the amount to change and it does not have a way to currently track the information, thus adding burden. Another bank recommended that financial institutions should not be generally required to report information on applications where no credit was extended, such as applications that were not completed by the applicant or where the applicant did not accept the terms. This bank reasoned that the amount approved data point is irrelevant because the loan was not originated and that it does not further the purposes of section 1071 because the information would not help the Bureau materially understand credit opportunities nor help ensure fair lending laws are enforced.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(a)(8) and associated commentary as proposed. The Bureau is also adding new comment 107(a)(8)–6. 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 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 excluding the amount approved for originated closed-end transactions, and requiring collection of the amount originated instead, would enhance the utility and quality of the data being reported, thus further the fair lending and business and community development purposes of section 1071.

In response to the commenters' suggestion that data on applications should not be reported in situations where the application is withdrawn or incomplete as well as the commenter's suggestion that the data are meaningless, the Bureau believes there is value in the data to be reported, even if no amount is reported for the amount approved or originated data point. Other information to be reported for the application that was, pursuant to § 1002.107(a)(9), withdrawn by the applicant or incomplete, can help further the fair lending and community development purposes of section 1071. For example, data from applications that are withdrawn or incomplete can help identify potential discriminatory practices in the application process and also indicate demand for credit by small business applicants. This would not be possible if data on applications that are withdrawn or incomplete are not reported. Accordingly, final comment 107(a)(8)–1 explains that for applications a financial institution, pursuant to § 1002.107(a)(9), reports as denied, withdrawn by the applicant, or incomplete, the financial institution reports that the amount originated or approved is “not applicable.” The Bureau also believes that reporting “not applicable” for amount approved or originated in certain circumstances will facilitate compliance for this data point.

The Bureau does not believe, as suggested by one commenter, that data on applications where the applicant did not accept the terms would not further the statutory purposes of section 1071. The data will help facilitate fair lending enforcement 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 data with respect to the amount approved will 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.

As stated above, the Bureau is finalizing the commentary to § 1002.107(a)(8) as proposed. Final comment 107(a)(8)–2 provides guidance on reporting the amount approved or originated data point when the transaction involves multiple approval amounts. The Bureau believes that reporting the highest amount approved when credit is approved but not accepted will most accurately reflect the amount of credit that was made available to the applicant in this situation. Final comments 107(a)(8)–3 and –4 provide guidance on reporting amount approved or originated for closed-end transactions and refinancings, respectively. Final comment 107(a)(8)–5 provides guidance on reporting amount approved or originated when the transaction involves counteroffers.

The Bureau is adding comment 107(a)(8)–6 to provide guidance on reporting amount approved or originated with respect to existing accounts. Comment 107(a)(8)–6 provides that the financial institution reports only the additional credit amount approved or originated for an existing account, and not any previous amounts that were extended. The Bureau believes this will help facilitate compliance for this data point.

The Bureau did not receive specific comments with respect to this data point on methods for avoiding misinterpretations of disparities between credit amount or limit applied for and credit amount or limit originated or approved and whether it would be useful and appropriate to require reporting of amount approved as well amount originated for originated closed-end credit transactions. The Bureau is therefore not requiring reporting of that additional data.

107(a)(9) Action Taken

Proposed Rule

ECOA section 704B(e)(2)(D) requires financial institutions to report the “type of action taken” on an application.

The Bureau proposed 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. In addition, the Bureau proposed to categorize all incomplete applications as a single category of “incomplete,” rather than following the approach in Regulation C of separately reporting denials based on incompletes and notices of incompleteness. Although the Bureau considered expanding the action taken codes to those currently used in Regulation C (including preapprovals or purchased loans), the Bureau did not believe those additional fields would have been 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.

Proposed comment 107(a)(9)–1 would have provided additional clarity on when a financial institution should select each of the proposed action taken codes. The financial institution would have identified the applicable action taken code based on final action taken on the covered application.

Proposed comment 107(a)(9)–2 would have provided instructions for reporting action taken on covered applications that involve a counteroffer, along with examples. The Bureau's proposed treatment of counteroffers would have aligned with how counteroffers are treated under existing § 1002.9 notification procedures and how they are reported under Regulation C. The Bureau also considered, but did not propose, adding an action taken category or flag for counteroffers. The Bureau believed the addition of a counteroffer flag or field would have provided limited useful information beyond what would have been captured under the proposal.

Proposed comment 107(a)(9)–3 would have discussed reporting action taken for rescinded transactions. Proposed comment 107(a)(9)–4 would have clarified 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 have provided guidance for reporting action taken if a financial institution issues an approval that is subject to the applicant meeting certain conditions.

The Bureau sought comment on proposed § 1002.107(a)(9) and its associated commentary.

Comments Received

The Bureau received comment on its proposal in § 1002.107(a)(9) to require reporting of action taken from a wide range of lenders, trade associations, and community groups.

Action taken categories in general. A number of commenters, including community groups, lenders, and a trade association supported the action taken reporting categories in proposed § 1002.107(a)(9). Two industry commenters agreed that proposed § 1002.107(a)(9) was a reasonable and appropriate means of implementing section 1071. One community group stated that the action taken codes are an essential metric to enforce fair lending laws and that the proposed action taken categories are substantially similar to those used for HMDA reporting, and so will be familiar to lenders. A joint letter from community groups, community oriented lenders, and business advocacy groups similarly supported use of the action taken fields that are also used for HMDA reporting. A trade association noted that action taken information is not typically collected by motor vehicle dealers in indirect vehicle finance transactions, but may be included by the finance source as part of the credit application decision.

Some commenters focused on particular proposed action taken categories, urging the Bureau to retain a proposed action taken category and not combine categories. For example, a several lenders and community groups specifically supported collection on incomplete and withdrawn applications. They asserted that it is important to collect data on applications that do not go through the full lending process ( i.e., through loan decisioning) in order to identify potential discouragement. Several commenters further explained that capturing incomplete and withdrawn applications would be important for fair lending assessments, as it would identify potential disparities in treatment, discouragement, and steering. In response to the Bureau's request for comment on whether to combine the “withdrawn by applicant” and “incomplete” categories, a community group supported the Bureau's proposed approach to keep the categories separate. The commenter asserted that data analysis and fair lending assessments would be more accurate if the withdrawn and incomplete categories are kept separate, as they represent different actions by the applicant. Another community group commenter supported distinct action taken categories for approvals and denials, noting, for example, research finding disparities in credit denials for Black, Latino, and Asian small businesses. A lender, however, urged the Bureau to use caution in interpreting and analyzing data collected under section 1071, noting for example that a high denial rate for different types of businesses ( e.g., small or minority-owned businesses) could be reflective of a financial institution's high volume of applications from such small businesses and not of a pattern of discriminatory lending.

In response to the Bureau's request for comment on whether to retain the “approved but not accepted” category, two community groups urged the Bureau to include this category among the available action taken options. The commenters argued that the approved but not accepted category could be used to identify instances where an applicant was offered loan terms that did not meet the needs of the small business (such as high pricing or other unfavorable terms), and could be tracked to identify potential disparities among women-owned or minority-owned small businesses, or other vulnerable populations. Another commenter argued that data may be misconstrued if approved but not accepted loans are treated as “denials.”

In contrast, several community banks urged the Bureau to remove certain proposed action taken categories. For example, a community bank argued against use of withdrawn by applicant or denied action taken codes, stating that there was no reason to report such applications and it would violate the applicant's trust. A different community bank urged the Bureau to remove the incomplete category, noting that financial institutions treat incompleteness as a denial under existing Regulation B (because it requires an adverse action notice or a notice of incompleteness), and that such events are better captured as denials or withdrawals.

In the NPRM, the Bureau also sought comment 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 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). A few industry and community group commenters specifically supported diverging from Regulation C and reporting denials based on incompleteness as “incomplete” applications, rather than “denied” applications. A CDFI lender and a community group stated that doing so would be in line with the intent of section 1071 and would lead to more accurate data by reserving the denied category exclusively for creditworthiness and underwriting factors. One trade association stated that such reporting would be easier to comply with and provide less opportunity for data errors, while another trade association noted that additional subcategories of incomplete would create confusion and add difficulty for financial institutions.

In contrast, several banks and a group of bank trade associations urged the Bureau to align reporting of incomplete applications with HMDA reporting. A bank commented that aligning with HMDA would increase efficiency for the customer, facilitate compliance, and ensure that financial institutions only need to collect data once. Similarly, several commenters argued that misalignment with HMDA would add substantial difficulty for financial institutions required to report under HMDA. However, some of those same commenters also stated that they were sympathetic to the Bureau's underlying reasons for wanting to report all incomplete applications in one category, and argued that this was further reason to exclude all HMDA transactions. A bank asked for clarification on how to report an application that results in adverse action based on incompleteness.

Treatment of counteroffers. The majority of commenters to address the issue, including several lenders, trade associations, and a community group, supported the Bureau's proposal as related to counteroffers. In response to the Bureau's request for comment on whether counteroffers that are not accepted should be reported as “approved but not accepted,” rather than “denied,” several commenters, including a community group and a CDFI lender, supported the Bureau's proposal that declined counteroffers would be recorded as denials and accepted counteroffers would be reported as originations. Several CDFI lenders further commented that this proposal would avoid lenders seeking to game the system and avoid reporting denials by giving unreasonable counteroffers likely to be denied by the applicant. In contrast, a trade association argued that counteroffers that are not accepted should be reported as “approved but not accepted” as it would better reflect the availability of credit. A bank asked how to report an accepted counteroffer that does not ultimately lead to an origination, and urged consistency with HMDA.

In response to the Bureau's request for comment on whether to specifically capture data on counteroffers, several industry commenters supported the Bureau's proposal to not separately track counteroffers. One of these commenters urged the Bureau to not separately track counteroffer terms (such as the amount requested and approved) as it would create burden for financial institutions, and if the offer was ultimately accepted, would not provide meaningful data. Similarly, other industry commenters argued that determining what is a counteroffer would be difficult and it would be infeasible to capture all data points for each counteroffer. A bank said that small business lending involves many discussions between the lender and the applicant, and so capturing counteroffers would be extraordinarily complex and require additional training. The industry commenters also stated that capturing counteroffers could lead to confusion and data errors. One of the commenters further urged the Bureau to align with Regulation C, which it asserted does not require reporting of counteroffers.

On the other hand, a CDFI lender and a joint letter from community and business advocacy groups urged the Bureau to require reporting of any counteroffers and their terms. These commenters suggested the Bureau modify the action taken fields to add “counteroffer accepted” and “counteroffer rejected,” and require reporting of pricing information on these options. The joint letter argued that separate reporting of counteroffers would provide visibility into pricing of credit offers made but not accepted or offers that otherwise do not result in an origination. The commenter further took issue with the aspect of the proposal that would require a lender to report it has denied an application, when it has in fact it had approved it on different terms. A CDFI lender similarly argued that the proposal provides a loophole for financial institutions, and urged the Bureau to require reporting of pricing on the initial request and any counteroffers to prevent exploitative lending. The commenter acknowledged, however, that the Bureau's proposal does not penalize entities seeking to provide assistance to businesses, which often entails multiple counteroffers to best meet the business's needs.

Finally, the joint letter from community and business advocacy groups asserted that the proposed definition of a counteroffer is problematic. Under the proposal, a counteroffer was described to occur when a financial institution offers to grant credit on terms other than those originally requested by the applicant. The commenter stated, however, that nothing requires a lender to initially solicit from applicants what terms they are seeking (other than amount applied for and credit type), and so it would not be clear when to treat an offer as a “counteroffer” for purposes of the rule.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(a)(9) with a minor revision for consistency, 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. Most commenters to address this issue generally supported the Bureau's proposed action taken categories, noting that the approach was a reasonable one and would assist in fair lending enforcement.

Although the Bureau sought comment on whether to remove or combine certain of the action taken categories, the Bureau is finalizing the list of categories as proposed in § 1002.107(a)(9). The Bureau is not eliminating the “approved but not accepted category”; data collected under this category would reflect demand for credit, and as noted by some commenters, could potentially be used to identify offers made that do not meet the needs of small businesses. Moreover, no commenter expressly urged the Bureau to remove the “approved but not accepted” category. The Bureau is also retaining the “withdrawn by the applicant” and “incomplete” action taken categories. As noted by some commenters, capturing data on incomplete and withdrawn applications is important to identifying potential discrimination and discouragement during the application process, and thus consistent with the purposes of section 1071. Next, the Bureau is keeping “withdrawn by the applicant” and “incomplete” as separate action taken categories; the categories represent different actions by the applicant, and so keeping them distinct will lead to more accurate data analysis, including better fair lending analysis. Moreover, the Bureau believes a high incidence of incomplete applications could potentially indicate that there is an issue with the level of assistance provided by a 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). Although a couple of community banks urged the Bureau to remove the “denied,” “withdrawn by applicant,” or “incomplete” action taken categories as unnecessary or inconsistent with current lender practice, the Bureau believes retaining those categories further the purposes of section 1071, as described above.

The Bureau is also finalizing § 1002.107(a)(9) to require a financial institution to report all incomplete applications—whether the application is closed or denied based on incompleteness—as the “incomplete” action taken category. While this proposed approach is not consistent with Regulation C comments 4(a)(8)(i)–4 and –6, there could be potential errors in the data if financial institutions report incomplete denials separate from notices of incompleteness. As noted by commenters, grouping all incomplete applications together would lead to more useful data by reserving the denied category solely for creditworthiness and underwriting decisions. Moreover, as noted by several commenters, grouping all incomplete applications in one category would be easier for financial institutions to implement. Although several industry commenters urged the Bureau to align reporting of incomplete applications with Regulation C in order to increase efficiency and facilitate compliance, those concerns are mitigated by the Bureau's decision to exclude reporting of all HMDA-reportable transactions, as set forth in final § 1002.104(b)(2). Indeed, one of the commenters advocating for alignment with Regulation C also stated that they were sympathetic to the Bureau's reasons for wanting all incomplete applications reported under a single category. In response to a commenter's question regarding the reporting of applications where an adverse action notice is provided based on incompleteness, under final § 1002.107(a)(9), the financial institution would report such an application as “incomplete,” rather than “denied.” In response to another commenter's concern that data may be misconstrued if approved but not accepted loans are treated as “denials,” the Bureau notes that there is a separate action taken category for “approved but not accepted” (see final § 1002.107(a)(9) and associated commentary for reporting of that action code).

The Bureau is also finalizing as proposed its treatment of counteroffers in final comment 107(a)(9)–2. The Bureau agrees with commenters that this approach (requiring that counteroffers that are not accepted to be reported as “denied,” rather than “approved but not accepted”) would prevent lenders from trying to improperly influence how their data are reported by extending unreasonable counteroffers that are likely to be denied. This approach is also consistent with existing § 1002.9 notification procedures and reporting of counteroffers under Regulation C, and so will be familiar to financial institutions. In response to a commenter's concern that this approach would not capture the availability of credit (as rejected counteroffers would be reported as “denials”), the Bureau believes the considerations noted above—preventing gamesmanship and consistency with existing Regulation B and Regulation C—outweigh the potential benefit of alternate reporting. In response to a commenter's question about how a financial institution reports an accepted counteroffer that does not ultimately lead to an origination, the Bureau directs the commenter to final comment 103(a)(9)–2, which provides that if an 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.

The Bureau is also finalizing comment 107(a)(9)–2 to not separately track counteroffers as an additional action taken category or flag. As noted by some commenters, it would be potentially infeasible to capture all data points for every back-and-forth counteroffer with an applicant, and attempting to do so would likely lead to confusion, heightened complexity, and data errors. The Bureau also believes that even without a counteroffer flag or field, the data will capture many of the terms of an accepted counteroffers (such as pricing, guarantee, etc.), as well as the amount initially requested by the applicant. Therefore, the addition of a counteroffer flag or field would provide limited useful information beyond what will already be captured under section 1071. 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 higher rates of counteroffers or denials compared to male- or non-Hispanic white-owned businesses), a flag alone would lack any specificity that could be leveraged for further fair lending analysis.

While several commenters urged the Bureau to require reporting of accepted and rejected counteroffers, as well as their pricing terms, the Bureau does not believe the benefits of additional reporting would outweigh the added complexity, logistical challenges, and potential data accuracy issues involved in reporting counteroffers. For example, while some commenters suggested adding counteroffer rejected and counteroffer accepted action taken categories, and to require reporting of pricing, the commenter does not explain how a financial institution would report multiple back-and-forth counteroffers connected to a single covered application, which some commenters report is typical in small business lending. Moreover, focusing solely on the pricing term of a counteroffer would leave unknown other material terms of a counteroffer, such the amount offered, duration, or a requirement to have a co-signer or guarantor. In response to commenters' concerns that not capturing counteroffers would mean a lack of visibility into counteroffers that are made but not accepted, the Bureau agrees that such information would not be captured, however, as described above, the Bureau believes that reporting of such data would add significant complexity, could undermine data quality, and would provide only limited additional benefits. Regarding some commenters' criticism that the definition of a counteroffer is flawed because it presumes a lender has solicited all requested terms from the applicant, the Bureau believes the description of a counteroffer in final comment 107(a)(9)–2 as an offer to grant credit or terms other than those originally requested by the applicant is a reasonable one: an applicant will likely specifically request the terms most important to the applicant, the definition is consistent with existing Regulation B and Regulation C and so will be familiar to financial institutions, and the commenters do not propose an alternative.

The Bureau is finalizing the commentary to § 1002.107(a)(9) with minor revisions for clarity and consistency. Final comment 107(a)(9)–1 provides additional clarity on when a financial institution should select each of the proposed action taken codes. The comment further clarifies that a financial institution identifies the applicable action taken code based on final action taken on the covered application.

Final comment 107(a)(9)–2 provides instructions for reporting action taken on covered applications that involve a counteroffer, along with examples. As described above, final comment 107(a)(9)–2 provides 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.

Final comment 107(a)(9)–3 discusses reporting action taken for rescinded transactions. Final comment 107(a)(9)–4 clarifies that a financial institution reports covered applications on its small business lending application register for the year in which final action is taken. Finally, final comment 107(a)(9)–5 provides guidance for reporting action taken if a financial institution issues an approval that is subject to the applicant meeting certain conditions.

107(a)(10) Action Taken Date

Proposed Rule

In addition to requiring financial institutions to collect and report the type of action they take on an application, ECOA section 704B(e)(2)(D) requires financial institutions to collect and report the “date of such action.”

The Bureau proposed § 1002.107(a)(10) to 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 have provided additional details on how to report the action taken date for each of the action taken categories in proposed § 1002.107(a)(9). For example, proposed comment 107(a)(10)–1 would have explained 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.

Proposed comment 107(a)(10)–4 would have explained that for covered credit transactions that are originated, a financial institution generally reports the closing or account opening date. That proposed comment also stated 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 sought comment on its proposed approach to the action taken date data point as well as whether it should adopt data points to capture application approval date and/or the date funds are disbursed or made available.

Comments Received

The Bureau received comments on the proposed action taken date data point from lenders, trade associations, and consumer groups. One commenter expressed its support for the data points regarding an application, including action taken date, noting that the data will provide insight regarding the quality of the capital accessed and that it will be useful in identifying potentially discriminatory lending practices, as well as highlight capital gaps in the marketplace that lenders may be able to fill. Furthermore, this commenter noted that the data will show how financial institutions compare across key metrics and help determine if the institution has equitable lending. Industry commenters expressed their support for the proposed data point as a reasonable and appropriate means of implementing the statutory requirement. A CDFI lender noted that defining “action taken date” as the one in which the financial institution acts is correct.

Several commenters provided feedback on whether the Bureau should adopt separate data points for application approval date and the date funds were disbursed or made available. A trade association opposed adoption of separate data points for the date the application was approved and the date the funds were disbursed or made available. This trade association reasoned that it would add degrees of complexity to the compliance process and the Bureau would be chasing de minimis data points that have diminishing value. A bank also opposed the separate data points explaining that the Bureau would already gather enough information from gathering the application date and the action taken date to find timing discrepancies and suggested the Bureau focus more on underwriting data to determine discriminatory and other fair lending issues. A CDFI lender explained that in many cases the gap between an approval and disbursal of funds can be affected by several factors outside a lender's control, such as an applicant's availability to sign closing documents.

On the other hand, three commenters urged the Bureau to adopt separate data points for application approval date and the date funds were disbursed or made available. A community group commented that separate data fields would be important for fair lending and community development purposes because if any institutions are delaying the availability of funds for unreasonable periods of time after loan approval, they would not be serving community needs, and it could also possibly indicate fair lending problems if protected classes disproportionately experience delays. Another community group suggested that discrimination in the agricultural industry occurs when loan approvals are delayed or not approved in a timely manner. This community group noted that untimely disbursement of funds could drastically impact the opportunity for a small business to succeed. They further noted that farmers lose entire seasons of income when the operating loans which they timely applied for are not approved in a timely manner. A third community group stated that lenders have a history of delaying loan approvals for farmers of color compared to white farmers.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(a)(10) and its associated commentary with minor edits for clarity and consistency. The Bureau believes the action taken date data point is a reasonable interpretation of ECOA section 704B(e)(2)(D), which requires financial institutions to collect and report the “date of such action” taken on an application. The Bureau notes that its 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 final § 1002.107(a)(9).

Final § 1002.107(a)(10) requires financial institutions to report the date of the action taken by the financial institution on the application. Final comments 107(a)(10)–1 through –5 provide guidance on how to report the action taken date for each of the action taken categories provided in final § 1002.107(a)(9). For applications that were denied, final comment 107(a)(10)–1 provides that a financial institution reports either the date the application was denied or the date the denial notice was sent to the applicant. For applications that were withdrawn by the applicant, final comment 107(a)(10)–2 provides that a financial institution reports either the date the express withdrawal was received or the date shown on the notification form in the case of a written withdrawal. For applications that were approved but not accepted by the applicant, final comment 107(a)(10)–3 provides that a financial institution reports any reasonable date, such as the approval date, the deadline for accepting the offer, or the date the file was closed. The comment notes, however, that the financial institution should generally be consistent in its approach.

The Bureau is finalizing comments 107(a)(10)–4 and –5 with minor edits for clarity and consistency to facilitate compliance. Final comment 107(a)(10)–4 provides that for applications that result in an extension of credit, a financial institution generally reports the closing or account opening date. However, 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 comment further provides that the financial institution should generally be consistent in its approach. Final comment 107(a)(10)–5 provides that for applications that are closed for incompleteness, a financial institution reports either the action taken date or the date the denial or incompleteness notice was sent to the applicant.

The Bureau is not adopting in this final rule a requirement that financial institutions report both the date the application was approved and the date the funds were disbursed. Two of the commenters who requested this change specifically focused on loan approval delays, which seems to indicate the issue is with delays in the loan approval process rather than the timing of the fund disbursements or credit availability. The application date and action taken date together will provide information about the length of time it takes for an application to reach the credit decision. In addition, the Bureau believes that the time between a loan's approval and the date of funds availability is dependent on many factors, some of which may not be within the control of the financial institution, as suggested by a commenter. Accordingly, the Bureau is not adopting a requirement that financial institutions report, in all cases, the date the funds were disbursed or made available.

107(a)(11) Denial Reasons

Proposed Rule

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 proposed § 1002.107(a)(11) to require financial institutions to collect and report the principal reason or reasons an application was denied.

Proposed § 1002.107(a)(11) would have required reporting of the principal reason or reasons the financial institution denied the covered application. Proposed comment 107(a)(11)–1 would have explained 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, and the financial institution would report only the principal reason or reasons it denied the application, even if there are fewer than four reasons. The proposed comment provided an example to illustrate. The proposed comment would have also stated that the reason(s) reported must accurately describe the principal reason or reasons the financial institution denied the application. Finally, the proposed comment provided 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 would also have explained that a financial institution would have reported 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 would report the denial reason or reasons as free-form text. Proposed comment 107(a)(11)–2 would have clarified 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 § 1002.107(a)(9), is not a denial.

The Bureau sought comment on its proposed approach to the denial reasons data point, including whether the denial reason categories listed in proposed comment 107(a)(11)–1 sufficiently cover the common credit denial reasons in the small business lending industry. The Bureau also sought 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 proposed denial reason categories and the data's ability to aid in fulfilling the purposes of section 1071.

Comments Received

The Bureau received comments on the denial reasons data point from lenders, trade associations, and community groups. A number of these commenters supported the Bureau's proposal to collect data on denial reasons, stating that it would aid in fair lending analysis and further the community development purpose of section 1071. A community group said that an analysis of different types of lenders could determine whether industry-wide practices could be creating unnecessary barriers, and denial reason data could help to illuminate those practices. Some commenters noted that denial reasons can help policymakers and the public determine legitimate reasons that small businesses do not qualify for certain forms of credit and will, in turn, enable policymakers to work towards solutions. A trade association commented that the data has the potential to help identify ways to improve service in underserved communities and agreed this is an opportunity to provide financial institutions with data to evaluate their business underwriting criteria and address potential gaps as needed. Another community group stated that this data point is one of the single most important items the Bureau can collect in its aim to carry out section 1071 and illuminate the reasons behind disparate results in small business lending. A bank commented that reporting of denial reasons would help identify roadblocks to gaining access to credit.

Commenters generally agreed with the Bureau's approach to collecting reasons for denial. Community groups supported the range of the Bureau's proposed list of reasons for denial as well as the Bureau's proposal for a financial institution to select up to four reasons. A trade association commented that the proposed list of reasons for denial adequately cover the potential reasons and noted that the list largely aligns with the HMDA/Regulation C denial reasons. This commenter also noted the importance of the option for financial institutions to select “other” and report additional denial reason information as free-form text.

Several community groups suggested that personal credit score must be included as an option as it is often cited as the reason for denial. They asserted that if low credit scores or other reasons for denial correlate with a business owner's race or location, but do not correlate with loan performance, then it would be important for lenders to use alternative methods for assessing creditworthiness that do not have a disparate impact on business owners of color or certain communities. Another commenter suggested that the Bureau consider clarifying the government criteria option, recommending that the option should only be used if no other principal reason applies and should come after other reasons to ensure that it does not mask those other reasons. A trade association suggested that the Bureau allow financial institutions the discretion to choose whether to report the data; however, that commenter also indicated that if the Bureau were to require the denial reasons data point then the proposed denial reasons did represent a full picture of the typical reasons for denial. Other commenters suggested the Bureau follow the flexible approach of financial institutions providing denial reasons in ECOA adverse action notices. Two banks asked the Bureau to compare the reporting requirement against other reporting regimes, such as HMDA and CRA, to avoid duplicative and inconsistent reporting.

Some industry commenters opposed the Bureau's proposal to collect denial reasons. A few commenters stated that these data are not tracked or maintained. A bank said stated they will need to build a new and independent tracking system if the data are mandated. A joint trade association letter noted that in indirect vehicle financing transactions, dealerships are not often provided and do not have access to reasons why a third-party financing source denied a credit application. A bank questioned what the Bureau intends to do with the data and stated that it is not necessary to meet the goals and requirements of section 1071. The bank further asserted that it would eventually result in additional regulatory requirements that continue to push small and mid-size lenders from the small business lending market. Another bank raised concerns about reporting denial reason data, asserting that there are multiple factors involved in the decisions and the use of raw data without any other means to evaluate the individual decisions made could lead to allegations of discrimination against banks based solely upon data that reflect disparate impact based on ethnicity, race, or gender. Another commenter expressed a similar concern that requiring denial reasons under certain categories could lead to damaging misinterpretations. A trade association urged the Bureau to drop the denial reasons data point from the final rule, stating that the requirement is drafted in a rigid manner that is unlikely to produce accurate or reliable data. That commenter also stated that the Bureau and other regulatory agencies already have access to these data because financial institutions are already providing denial reasons under the ECOA adverse action notice requirement. In addition, commenters further noted that the proposed denial reason data point is incompatible with the Bureau's flexible approach to providing adverse action reasons in ECOA adverse action notices.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(a)(11) and associated commentary with minor revisions. The final rule requires that financial institutions collect and report, for denied applications, the principal reason or reasons the financial institution denied the covered application. The Bureau believes data regarding denial reasons will further the fair lending and business and community development purposes of section 1071. Data on denial reasons will allow 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. Robust data on application denial reasons across applicants, financial institutions, products, and communities should help target limited resources and assistance to applicants and communities, thus furthering section 1071's business and community development purpose. Furthermore, data on denial reasons will help data users analyze potential denial disparities, and could facilitate more efficient and less burdensome fair lending examinations. Therefore, pursuant to ECOA section 704B(e)(2)(H), the Bureau determines that collecting data on denial reasons would aid in fulfilling the purposes of section 1071.

Final comment 107(a)(11)–1 explains that a financial institution reports the principal reason or reasons it denied the application, indicating up to four reasons and makes clear that the financial institution reports only the principal reason or reasons it denied the application. Final comment 107(a)(11)–1 also provides a list of denial reasons from which financial institutions select the principal reason or reasons for denying a covered application. In addition, final comment 107(a)(11)–1 explains that a financial institution reports the denial reason as “other” when none of the enumerated denial reasons adequately describes the principal reason or reasons it denied the application, and reports the denial reason or reasons as free-form text. The Bureau believes that including the option to select “other” will facilitate compliance and that collecting such information will enable the Bureau to observe trends and key developments in the small business lending market. In addition, the Bureau may use the information to inform any future iterations of the list.

The Bureau is making a revision in comment 107(a)(11)–1.iii to change “use of loan proceeds” to “use of credit proceeds” to reflect commonly understood categories of small business lending like term loans or lines of credit. The Bureau is also making a clarification in comment 107(a)(11)–1.iii to broaden the scope of the “use of credit proceeds” denial reason. Final comment 107(a)(11)–1.iii explains that a financial institution reports the denial reason as “use of credit proceeds” if it denies an application because, as a matter of policy or practice, it places limits on lending to certain kinds of businesses, products, or activities it has identified as high risk. The Bureau is removing the example provided in the proposed rule because the Bureau does not believe an example is necessary and financial institutions know what they consider to be high risk to them. Moreover, financial institutions may have different policies on credit activities or products they consider high risk such that a high risk activity or product to one financial institution may not be considered high risk to another.

The Bureau is also making a minor revision in comment 107(a)(11)–1.v to clarify that a denial reason based on collateral refers to collateral that was insufficient or otherwise unacceptable to the financial institution. The Bureau also removed the example that appeared in proposed comment 107(a)(11)–1.vi.

The Bureau is making a minor change in comment 107(a)(11)–1.vii to clarify that a denial reason based on “government criteria” refers to government loan program criteria. Government loan program criteria for this purpose refers to those loan programs backed by government agencies that have specific eligibility requirements. Accordingly, final comment 107(a)(11)–1.vii lists “government loan program criteria” as a denial reason option.

The Bureau does not share the concerns raised by commenters that denial reason data may lead to unjustified conclusions that do not necessarily meet the goals and purposes of section 1071. Rather, as explained above, the Bureau believes data on denial reasons can help identify potential lending concerns and help data users analyze potential denial disparities. In fact, the Bureau believes that including denial reasons in 1071 data should reduce the risk of inaccurate accusations of fair lending violations, as it would allow financial institutions to point to potentially legitimate reasons for disparities.

With respect to the comments that denial reasons are not currently tracked or maintained, the Bureau believes that most financial institutions already have information on denial reasons, or at least should be prepared to provide the information. The Bureau understands from commenters that there may be creditors that are not subject to the adverse action notice requirements under Regulation B and such institutions may face greater challenges in implementing the denial reason data reporting requirement than those institutions that are already subject to Regulation B requirements. Nevertheless, the Bureau believes that data on denial reasons will further the fair lending and business and community development purposes of section 1071 by helping to identify potential fair lending concerns and providing financial institutions with data to evaluate their lending criteria and address potential gaps. Moreover, data on denial reasons not only help identify potential fair lending concerns, but are critical to understanding the rationale behind a financial institution's decision to deny credit, which can provide small business applicants the information they need to be able to access capital.

For transactions involving indirect vehicle financing where the dealership may not have the reasons why a third-party financing source denied a credit application, the Bureau believes that the entity that makes the final credit decision will be able to provide or obtain the reasons for denying a credit application. See section-by-section analysis of § 1002.109(a)(3) for a discussion of which institutions have a reporting obligation in transactions involving multiple financial institutions.

With respect to the suggestion from a commenter that the Bureau should allow financial institutions to report denial reason data voluntarily, the Bureau believes optional reporting is not the appropriate approach, given the need for consistent and meaningful data to further the purposes of section 1071.

Regarding the suggestion that the denial reason data point in the final rule should mirror the HMDA reporting requirements or other reporting regimes, the Bureau's approach to the final rule is to largely mirror the Regulation C reporting requirements but with modifications that better reflect the business or agricultural lending (rather than mortgage lending) context. The Bureau believes that aligning closely to a known regulatory scheme, such as Regulation C, will facilitate compliance. Regarding the suggestion that the Bureau provide more flexibility so that financial institutions can report the reasons that were provided in an adverse action notice, the Bureau believes, and as a commenter noted, the denial reasons proposed and finalized in this rule are a comprehensive list and represent a full picture of the common denial reasons for small business credit. In addition, the Bureau believes the inclusion of “other” as a reason for denial and the free-form text field, which will enable financial institutions to report a denial reason that is not otherwise listed, will provide flexibility, and will facilitate compliance.

107(a)(12) Pricing Information

Proposed Rule

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 proposed, 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 have required 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 have required financial institutions to report the total origination charges for a covered credit transaction; proposed § 1002.107(a)(12)(iii) would have required financial institutions to report the broker fees for a covered credit transaction; proposed § 1002.107(a)(12)(iv) would have required 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 have required financial institutions to report, for merchant cash advances 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 have required financial institutions to report information about any prepayment penalties applicable to the covered credit transaction.

Proposed comment 107(a)(12)–1 would have clarified 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 have applied only to credit transactions that either have been originated or have been approved by the financial institution but not accepted by the applicant.

Comments Received

The Bureau sought comment on proposed § 1002.107(a)(12) and its commentary, including on additional information that could help reduce misinterpretations of disparities in pricing, such as more information about the nature of the collateral securing the credit. The Bureau also sought 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. Numerous commenters addressed the proposed pricing data point in their feedback. The Bureau addresses feedback on proposed § 1002.107(a)(12) generally in this section; feedback on specific aspects of proposed § 1002.107(a)(12)(i) through (vi) is addressed in the section-by-section analyses that follow.

Many commenters expressed views on whether the Bureau should require financial institutions to report any pricing data. Some commenters, including community groups, trade associations, a lender, and a technology service provider, supported the inclusion of pricing information. These commenters stated pricing information will help data users understand not simply whether credit is available to certain borrowers, but the terms of such credit. Several community groups said that pricing information would help with fair lending analysis, with one community group stating that academic research and mystery shopping tests suggested the presence of discrimination in the small business lending market. Other community groups said that pricing information would allow users to identify unmet business needs. A community group commented that lenders were already collecting much of the proposed pricing data for SBA and CDFI programs, while a trade association supported the proposal but noted that CDFIs would need more time to comply than larger financial institutions.

Industry commenters generally opposed including pricing information in the final rule. These commenters made several arguments in support of their position. First, they asserted that the final rule should include only data points specifically enumerated in the statute. One commenter suggested that because pricing was not expressly enumerated in the statute, Congress therefore did not intend for the data collected and reported pursuant to section 1071 to include pricing information. Other commenters said that pricing data (along with other data points adopted pursuant to ECOA section 704B(e)(2)(H)) would increase the burden on financial institutions because, for example, pricing information can change throughout the application and underwriting process. And several industry commenters who generally objected to the inclusion of any data points pursuant to section 704B(e)(2)(H) claimed that lenders lack systems that can calculate or collect all the proposed pricing data.

Second, these commenters stated that commercial financing is less standardized than consumer financing, such that pricing is influenced by a wide variety of factors that they believed would not be adequately reflected in the 1071 data. Factors cited included the credit score of the applicant, the nature and value of collateral, the loan purpose and type, the presence of bundled services, the applicant's cash flow, the type of business, the size of any down payment, the strength of any guarantee, and debt service coverage ratio. Commenters elaborated on certain factors specific to certain financial institutions or transaction types. For example, a few commenters stated that community banks might make loans with higher interest rates than other lenders to comply with safety and soundness requirements. Some agricultural lenders and a trade association commented that farm credit borrowers periodically receive patronage dividends from lenders, which effectively lowers the cost of credit. And a group of trade associations representing the insurance premium financing industry stated that the pricing of insurance premium financing is determined almost entirely by the value of the unearned premiums, negating the benefit of pricing data for these transactions.

The absence of information about these other factors affecting the price of credit, commenters argued, would cause data users to draw inaccurate conclusions when analyzing pricing in the 1071 data. As a result, commenters claimed, financial institutions would suffer reputational harm from erroneous accusations of fair lending violations or other harmful pricing practices. However, a community group commented that advocates knew how to responsibly use pricing data and typically approach regulators or industry before publicizing pricing discrepancies. Industry commenters also argued that misleading data would reduce financial institutions' willingness to consider individualized factors in the lending process, restricting the availability of credit to small business applicants.

Many industry commenters also opposed the disclosure of any pricing information because of competition and privacy concerns. These commenters claimed that disclosure would reveal confidential information that would put financial institutions at a disadvantage. For example, competitors could attract borrowers with loans that were cheaper but inferior in other respects. These commenters also asserted that disclosure of pricing information would harm the privacy interests of applicants, especially in small communities where users could re-identify borrowers.

Instead of including pricing information in the final rule, several industry commenters suggested that analysis of pricing data was more appropriate in the supervision and examination context. One trade association asserted that requiring pricing data in the rule would be redundant of, or usurp, the supervisory activities of the prudential regulators because those agencies also collect and use pricing information in their exams. Another group of trade associations said the Bureau could use information it gathers in the course of exercising its supervision authority to determine whether pricing data could further fair lending purposes before requiring such data in the rule.

In contrast to industry commenters, who generally objected to reporting any pricing information, community groups requested additional pricing information. Specifically, numerous community groups and a minority business advocacy group, as well as some lenders and a technology service provider, asked the Bureau to require financial institutions to report the annual percentage rate (APR) for a covered credit transaction. These commenters stated that APR was the only easily understandable, uniform, and comprehensive single pricing measure for comparing diverse transactions. These commenters generally did not argue that the proposed pricing data point lacked value, but that APR would provide additional information that was superior in certain respects. For example, a cross-sector group of lenders, community groups, and small business advocates asserted that the diversity of transactions in the small business lending market increased the value of APR, because comparing loan pricing would be difficult without a single measure. This group further stated that unlike the proposed pricing data, which lacked a time period, APR standardizes the cost of a transaction over a year.

A few commenters believed that APR would make the pricing data easier for data users to understand. Some stated that although sophisticated data users might be able to estimate APR from the proposed data points, the 1071 data should allow anyone to gain information about small business loan pricing. Also, the cross-sector group's comment discussed above noted that many small business owners are familiar with APR from their consumer financing transactions.

Regarding burden, several of these commenters asserted that calculating APR was feasible in the small business lending market, with many noting that APR is a formula amenable to calculation through an automated process using generally available software. For non-traditional transactions such as merchant cash advances, commenters suggested estimating the term length from repayment data or from the term, if any, that the financial institution calculated during the underwriting process. Indeed, some of these commenters also believed that the market was evolving toward the use of APR for commercial finance transactions. They cited the New York and California commercial financing disclosure laws, as well as private disclosure initiatives that include the APR, such as the SMART Box and Small Business Borrower's Bill of Rights. A CDFI lender predicted that financial institutions would eventually use a single disclosure to comply with all State disclosure laws, which would resolve any issues with differing APR methodologies among the states. A bank commented that if the Bureau required pricing information, it should adopt only APR because reporting APR was simpler than reporting multiple pieces of pricing information.

A few commenters suggested alternatives if the Bureau did not adopt APR, including requiring APR for a subset of transactions for which calculating APR was feasible or having the Bureau calculate and publish APR data itself.

Although industry commenters largely did not address APR, a few offered arguments against its inclusion in the final rule. A group of trade associations questioned the existence of a trend toward the use of APR in commercial financing, noting that only California and Virginia had adopted commercial financing disclosure laws at the time of the NPRM. This group also speculated that Congress believed APR may be inappropriate for the small business lending market because it did not extend TILA to commercial credit in the Dodd-Frank Act. Other commenters discussed the burden of reporting APR. Several banks stated that lenders would need to change their systems to calculate APR for small business loans. A State bankers association asserted that the terms of small business loans did not allow APR to be calculated. And a CDFI lender stated that APR calculations are infeasible for loans made under the SBA's 7(a) program. Such loans, the commenter explained, have fees that may vary based on the type or purpose of the loan, which makes the APR difficult to determine accurately.

Finally, some commenters directed their feedback to the scope of the proposed pricing data point. Some community groups asked the Bureau to require pricing information for all counteroffers because, they asserted, such information would illuminate situations where lenders are prepared to extend credit on less desirable terms than those requested by the applicant. An industry commenter recommended limiting the pricing information to originated transactions because it believed pricing information for approved applications held no fair lending value. But some community groups commented that including approved applications in reported pricing data would further fair lending purposes, such as allowing data users to evaluate whether financial institutions are offering high-priced loans to minority applicants that the applicants do not accept. A trade association commented that the pricing information should include only interest rate and origination charges but offered no explanation for its position.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(a)(12) and associated commentary with certain adjustments. Final § 1002.107(a)(12)(i) through (vi) require reporting of the following for covered credit transactions that are originated or approved by the financial institution but not accepted by the applicant: interest rate; total origination charges; broker fees; the total amount of all non-interest charges that are scheduled to be imposed over the first annual period; for a merchant cash advance or other sales-based financing transaction, the difference between the amount advanced and the amount to be repaid; and information about any applicable prepayment penalties. The details of final § 1002.107(a)(12)(i) through (vi) are discussed in turn in the section-by-section analyses that follow; the discussion here focuses on the Bureau's overall approach to the pricing data point.

The Bureau is finalizing comment 107(a)(12)–1 as proposed, which clarifies 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.”

As discussed in the NPRM, the Bureau believes that pricing data will further both the fair lending purpose and the business and community development purpose of section 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. 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 than those that are not minority-owned, and a 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 obtaining credit, such as being offered high interest rates. 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. 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. To the extent that the recovery from the lingering economic disruptions following the COVID–19 pandemic is still ongoing when covered financial institutions begin collecting data under this final rule, and in regard to 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 they offer useful insight into underwriting disparities and are necessary for data users to examine predatory pricing or pricing disparities. For example, they might show that a particular market segment is expanding and apparently filling an important need, but the new credit offered might be predatory in nature. Pricing information will 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 credit 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 will also increase transparency and help demonstrate to lenders where business opportunities exist to offer sustainable credit to underserved markets. In addition, it could demonstrate to small businesses the availability of more affordable credit.

Pricing information that is separately enumerated as the interest rate and general categories of fees will allow data users to more precisely analyze the components of a credit transaction's price. For example, data users will be able to 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 should allow data users to better identify business and community development initiatives because they will be able to target their initiative at the particular component, such as the interest rate, that may be most responsible for the relatively high price of the transaction. The Bureau's decision not to require reporting of APR, as requested by some commenters, is discussed in more detail below.

The Bureau disagrees with commenters who suggested the pricing data point lacks congressional authorization. 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].” This provision reflects Congress's understanding that certain information not explicitly identified in section 1071 may advance the statutory purposes. As described herein, the pricing data point satisfies this standard.

The Bureau understands that the small business lending market is flexible and tailored to the situations of small business applicants and borrowers. For this reason, pricing for small business credit is affected by numerous factors, some of which are not reflected in the 1071 data. For example, the final rule does not require financial institutions to report applicants' credit scores, which would provide useful information for explaining pricing differences between transactions. But the Bureau believes that commenters have understated the amount of information the final rule includes about factors relevant to pricing. For example, the final rule includes information about the existence and nature of collateral; the credit purpose and type; the applicant's industry, size, and history; the type of guarantee; and the type of the lender. This information will provide important context for pricing data.

More broadly, the 1071 data need not reflect every determinant of credit pricing to provide value to users. The pricing data will further fair lending enforcement by allowing regulators to better understand fair lending risks and allocate their resources accordingly. As explained in the NPRM, HMDA data have long served a similar function. Some commenters questioned the analogy to HMDA data, citing greater standardization in the mortgage market. But the same basic utility—signaling fair lending risk—exists even if the nature of the signal differs. Indeed, with respect to entities it supervises, the Bureau similarly uses pricing data, when available in small business examinations, to help identify fair lending risk.

Regarding suggestions that the Bureau consult supervisory and examination data before adopting any pricing data requirements, the Bureau has relied on its experience in these areas while developing the final rule. The Bureau does not believe this rule is redundant of the supervision and examination activities of any Federal agency. Moreover, confidential supervisory information available only to Federal regulators is no substitute for a publicly available dataset.

Furthermore, comments that focus narrowly on comparisons between applicants ignore the business and community development purpose of section 1071. Data users can examine pricing data at a more general level to further this purpose. For example, government entities could develop loan programs designed to increase the availability of credit to certain small businesses whose existing financing options carry high prices.

Regarding comments about the harmful consequences of potentially misleading data, the Bureau anticipates noting when disclosing the 1071 data that the data alone generally do not offer proof of compliance with fair lending laws. And the Bureau expects community groups to use the data responsibly, with knowledge of these limitations, which such groups say they have. The Bureau does not believe, as suggested by commenters, that pricing data would reduce the availability of credit to small business applicants. Instead, by helping to reduce fair lending risk and identify business and community development opportunities, the pricing data will help expand access to credit. Privacy and confidentiality concerns about the pricing data are discussed in part VIII.B.6.x below.

The Bureau understands that many financial institutions will incur costs to collect and report pricing information. The Bureau has attempted to reduce the difficulty of collecting and reporting these data in several ways. For example, final § 1002.107(a)(12) is limited to approved applications and originated transactions. These are transactions for which financial institutions generally would have to determine the price to approve (or originate) the transaction. Other transactions— i.e., those that are denied, withdrawn by the applicant, or incomplete—are likely to have pricing information that is subject to change or that has not yet been determined. In addition, final § 1002.107(a)(12) generally takes a broad, functional approach to the reportability of pricing information, rather than defining reportability according to complex factors such as how a fee is denominated or the nature of the collateral securing a transaction. The Bureau believes this will simplify the collection and reporting process. Despite any remaining burden for financial institutions, the Bureau believes that pricing data are important for achieving both of section 1071's purposes.

Further reducing the potential difficulty of reporting pricing data, the Bureau has decided against requiring financial institutions to report APR at this time. Calculating and reporting APR across the diverse types of commercial transactions covered by the final rule may require complex estimates to generate necessary variables for the APR formula. Many merchant cash advances, for example, lack a disclosed periodic payment amount. Thus, financial institutions would have to estimate this term, if they do not do so now, to calculate an APR. Although financial institutions may estimate some of the necessary information during underwriting, they may not estimate it according to the same formula, and may not maintain such information in a system designed for data reporting. The Bureau understands that many financial institutions will calculate APR to comply with State commercial financing disclosure laws. But many financial institutions are not currently subject to such State laws, or are subject to State laws that do not require APR disclosure. As noted in the NPRM, the Bureau will continue to monitor regulatory developments in the small business lending market. The Bureau considered requiring reporting of APR only for transactions where it is less complex to calculate, as some commenters suggested. But a limited-transaction APR reporting requirement would negate two important benefits that commenters cited for APR: using it to compare diverse types of transactions and to apply a single intuitive pricing measure for nontraditional types of financing.

The Bureau understands commenters' concerns over the accessibility and comparability of rate and fees versus APR. Final § 1002.107(a)(5)(iii) requires financial institutions to report loan term; the Bureau has added to final comment 107(a)(6)–8 a requirement that financial institutions report, for merchant cash advances and other sales-based financing, the loan term, if any, that the financial institution estimated, specified, or disclosed in processing or underwriting the application or transaction. This information will provide important context for data users comparing the pricing of different transactions and help address the criticism over the lack of a time period for pricing data. Regarding accessibility, the Bureau believes the pricing data will be generally understandable by data users. Most of the pricing data are similar to information found on existing consumer and commercial credit disclosures, including the State commercial financing disclosures cited by commenters. Additionally, the Bureau anticipates that government agencies, researchers, press organizations, community groups, and others will publish research and reports using the small business lending data, just as they do now with HMDA data. These publications may render pricing information in a form more accessible to other users.

Finally, the Bureau is not adopting modifications to the scope of the pricing data point. As discussed above, limiting the pricing data to approved and originated transactions reduces the difficulty of reporting while providing important information about the pricing decisions of financial institutions. The Bureau does not believe, as suggested by a commenter, that approved but not accepted applications lack value for fair lending analysis. Rather, these applications are similarly valuable because they also reflect transactions for which the lender has made a credit decision and set the pricing for the transaction. Lastly, limiting final § 1002.107(a)(12) to interest rate and origination charges would deprive data users of the benefits of other pricing information. The importance of each aspect of the pricing data point is discussed in the section-by-section analyses that follow.

107(a)(12)(i) Interest Rate

Proposed Rule

Proposed § 1002.107(a)(12)(i)(A) would have required 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 have required the submission of the margin, index value, and index name that is or would be applicable to the covered credit transaction at origination.

Proposed comment 107(a)(12)(i)–1 would have clarified 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 have explained 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 listed a number of indices to report and directed 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 field.

Proposed § 1002.107(a)(12)(i)(B) would have provided 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. Proposed comment 107(a)(12)(i)–4 would have clarified 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 sought comment on whether the index value should be reported based on a different time period or whether the index value should be reported at the time of approval.

The Bureau sought 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. Lastly, the Bureau sought 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.

Comments Received

The Bureau received comments specifically regarding the collection of interest rate from banks and trade associations, among others. While some commenters supported the Bureau's proposal, several industry commenters had questions regarding how the provision would work. The community group stated that interest rate information is beneficial as long as data users have access to both the initial interest rate and the interest rate after a potential initial rate reset. An industry commenter agreed that interest rate information would be helpful in conducting fair lending analyses. In contrast, a bank commenter asserted that interest rate information is of limited value.

Regarding the details of the Bureau's proposal to collect interest rate, a bank commenter noted that commercial loans may have more than one interest rate. With respect to indices for variable rate transactions and the Bureau's solicitation of comment on whether the index value should be reported based on a different time period or if at approval is the most appropriate time to measure, a group of trade associations asserted in their comment that the index value is often not related to the timing of approval or origination, and will not provide useful data, while a bank commented that it would be less burdensome to report the index value used to establish the interest rate rather than the value at the time of approval. A State bankers association asserted that the index value at approval may not have any connection to the price of the loan, providing the example of agricultural lending where the rate and terms are set after the financial institution approves the loan. Two industry commenters noted that the index value could change between approval and origination. Another bank requested that Constant Maturity Treasury (CMT) rate be included in the list of indices. Two trade associations inquired as to how to report an internal index used to set the rate on a variable rate transaction, while a bank commenter stated that use of internal indices that are unique to a financial institution would make interest rate data difficult to interpret.

A bank requested clarification of the term “introductory period.” Another bank asserted that for a variable interest rate transaction with a five-year introductory period, the interest rate data reported at approval will be outdated and inaccurate when the period ends. Finally, a trade association inquired as to how a financial institution would report an interest rate that is unknown at origination, such as a line of credit whose interest rate changes based on the amount advanced.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(a)(12)(i) with one addition, as well as with other adjustments and additions to the commentary to address comments received regarding introductory interest rate periods and adjustable interest rates. Final § 1002.107(a)(12)(i) requires financial institutions to report the interest rate that is or would be applicable to the covered credit transaction. If the interest rate is adjustable, final § 1002.107(a)(12)(i)(B) requires the submission of the margin, index value, introductory rate period expressed in months (if applicable), and the index name that is or would be applicable to the covered credit transaction. As with all aspects of pricing within § 1002.107(a)(12), this requirement applies 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 collection of the interest rate on the covered credit transaction furthers both the fair lending purpose and the business and community development purpose of section 1071 by allowing regulators, small business 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 will provide pricing transparency and will encourage the development of successful lending models because policymakers, community organizations, investors, banks seeking partnerships, and others will have better visibility into which business models are successful at providing sustainable credit to minority-owned, women-owned, and other underserved small businesses.

Furthermore, research has found that minority-owned businesses tend to obtain, or be offered, higher interest rates on business credit than non-minority-owned businesses. 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.

In general, interest rate information should be in or readily determinable from the credit file, and thus available for reporting. To the extent that it is not, the Bureau notes that certain State-level commercial lending disclosures, notably those of California and New York, require the disclosure of APR. Because the interest rate must be known to calculate APR, the Bureau believes that final § 1002.107(a)(12)(i) imposes 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.

As noted above, final § 1002.107(a)(12)(i) remains largely the same as proposed § 1002.107(a)(12)(i). However, the Bureau has added to final § 1002.107(a)(12)(i)(B) a requirement that financial institutions report the initial rate period expressed in months (if applicable) (along with the margin, index value, and the index name that is or would be applicable to the covered credit transaction, as proposed). The Bureau agrees with commenters that for transactions with a variable interest rate where there is an initial rate and the interest rate resets after a certain period, at the time the financial institution approves the transaction and sets the interest rate, the financial institution will not know the future value of the index used to create the interest rate. By collecting the number of months of the initial period (if any), the rule will allow data users to determine the accurate interest rate applicable to the transaction because they will have the name of the index and the timing of the index value. For example, as written in final comment 107(a)(12)(i)–2, 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, the number “6” for the length of the initial rate period, Prime as the name of the index used to adjust the interest rate, and “not applicable” for the index value.

New comment 107(a)(12)(i)–1 clarifies that a financial institution complies with § 1002.107(a)(12)(i) by reporting the interest rate applicable to the amount of credit approved or originated as reported pursuant to final § 1002.107(a)(8). The Bureau is adopting this comment to address the issue raised by a commenter as to how a financial institution would report an interest rate that is unknown at origination or where the rate changes based on the amount advanced, such as with some lines of credit.

The Bureau is adopting comment 107(a)(12)(i)–2 (renumbered from 107(a)(12)(i)–1 in the proposal) with several alterations. Final comment 107(a)(12)(i)–2 clarifies that if a covered credit transaction includes an initial period with an introductory interest rate of 12 months or less, after which the interest rate adjusts upwards or shifts from a fixed to a variable rate, a financial institution complies with the provision by reporting information about the interest rate applicable after the introductory period. If a covered transaction includes an initial rate period of more than 12 months after which the interest rate resets, a financial institution complies with the provision by reporting information about the interest rate applicable prior to the reset period. Final comment 107(a)(12)(i)–2 also provides two examples to illustrate these scenarios. The Bureau's revisions to this comment address a commenter's request to clarify the term “introductory period” (which the Bureau has done by clarifying that an introductory period includes an initial period of 12 months or less after which the interest rate adjusts upward or shifts from a fixed to a variable rate), as well as another commenter's concern that in a transaction with a five-year introductory period, the interest rate reported at approval will be outdated and inaccurate when the period ends.

Final comment 107(a)(12)(i)–3 (renumbered from proposed comment 107(a)(12)(i)–2 with one non-substantive adjustment) clarifies that 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 pursuant to final § 1002.107(a)(8). The comment also provides an example.

Final comment 107(a)(12)(i)–4 (renumbered from proposed comment 107(a)(12)(i)–3) includes a list of indices for reporting the appropriate index for variable rate transactions, and also specifies that a financial institution reports “other” and reports the index name in free-form text if the applicable index is not listed. The Bureau has added CMT to the list of indices in the comment, as requested by a commenter. In response to requests from a number of commenters for clarification as to how a financial institution should report internal indices, the Bureau has also added “Internal Index” to the list of indices in the comment. The Bureau believes that allowing financial institutions to choose “other” when an index used does not appear on the provided list will facilitate compliance. In addition, collecting this information on “other” indices will 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.

Final comment 107(a)(12)(i)–5 (renumbered from proposed comment 107(a)(12)(i)–4) clarifies that a financial institution complies with § 1002.107(a)(12)(i) by reporting the index value used to set the rate that is or would be applicable to the covered transaction. Proposed comment 107(a)(12)(i)–4 would have required financial institutions to report, for covered transactions with an adjustable interest rate, the index value applicable at the time the application was approved by the financial institution. Some commenters stated that the index value at the time of approval may have no relationship to the index value used to set the interest rate and that it would be less burdensome to report the index value used to establish the interest rate rather than the value at the time of approval. To address these concerns, the Bureau has adjusted final comment 107(a)(12)(i)–5 to require reporting of the index value used to set the rate that is or would be applicable to the covered transaction. In most cases, this will be the index value at the time of approval, because the financial institution will set the pricing when the credit decision is made, but in cases where there might be a difference, this comment as revised will ensure that financial institutions are reporting the index value actually used to establish the interest rate, rather than the value that otherwise exists at the time of approval.

107(a)(12)(ii) Total Origination Charges

Proposed Rule

Proposed § 1002.107(a)(12)(ii) would have required 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 have clarified that charges imposed uniformly in cash and credit transactions are not reportable. Proposed comment 107(a)(12)(ii)–2 would have provided guidance on reporting charges imposed by third parties. Proposed comment 107(a)(12)(ii)–3 would have clarified that broker fees are included in the total origination charges. Proposed comment 107(a)(12)(ii)–4 would have provided guidance on reporting charges for other products or services paid at or before origination. And proposed comment 107(a)(12)(ii)–5 would have listed examples of reportable charges.

The Bureau sought comment on proposed § 1002.107(a)(12)(ii) and its commentary, including whether concepts and guidance adapted from Regulation Z, such as proposed comment 107(a)(12)(ii)–1 on comparable cash transactions, were applicable in the small business lending context such that they should be incorporated as drafted. The Bureau also sought 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.

Comments Received

The Bureau received comments specifically regarding total origination charges from several banks and trade associations, along with a community group and a joint letter from a cross-sector group of lenders, community groups, and small business advocates.

A few industry commenters questioned the utility of information about total origination charges. For example, several commenters asserted that proposed § 1002.107(a)(12)(ii) would not provide useful data because the amount of origination charges may vary based on factors not captured by the 1071 data, such as geographical differences in appraisal fees. A group of trade associations stated that including broker fees while itemizing them separately in another data field would inflate the amount of origination charges. And a bank preferred to report only origination points but believed that such data would provide only limited value. This commenter did not define origination points but the Bureau understands the term to refer to one way that financial institutions denote fees paid to the lender for originating the loan. However, the cross-sector group commented that total origination charges would be especially helpful for data users examining the cost of merchant cash advances because these transactions include upfront fees not otherwise captured in the pricing data.

A few commenters asserted that reporting total origination charges would be burdensome. For example, several industry commenters stated that calculating the finance charge under Regulation Z, which defines certain charges similar to the proposed total origination charges data field, is complex and not performed for commercial credit transactions. And a trade association suggested that the proposed treatment of certain charges, such as a borrower's premium for property insurance, was unclear.

Several commenters addressed specific aspects of total origination charges. For example, a community group stated that charges imposed uniformly in cash and credit transactions should be reportable because, they asserted, such charges are rare and the existence of such an exclusion may encourage fee shifting. Conversely, a trade association stated that any charge imposed uniformly on all applicants should be excluded because such a charge could not be the source of a pricing disparity. Several industry commenters stated that third-party charges should be excluded because the imposition of such fees is often outside a financial institution's control, while a group of trade associations found the treatment of such charges confusing. Finally, another trade association stated that aligning the definition of total origination charges to Regulation C's definition of origination charges used to report data under HMDA would provide helpful clarity because the Regulation C definition is understood to include only charges retained by the financial institution.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(a)(12)(ii) with additional clarifying commentary. Final § 1002.107(a)(12)(ii) requires 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. As with all aspects of pricing within § 1002.107(a)(12), this requirement applies to credit transactions that either have been originated or have been approved by the financial institution but not accepted by the applicant.

The Bureau is finalizing comments 107(a)(12)(ii)–1 through –5 as proposed. In addition, the Bureau is adopting final comment 107(a)(12)(ii)–6, which clarifies the reporting of a net lender credit provided by a financial institution to an applicant at origination.

As discussed in the NPRM, total origination charges provide information about an important component of pricing for small business credit: the upfront cost of originating and extending credit. This relatively specific information enables insight into credit pricing that would be obscured by more general information, such as the trade-offs between the interest rate and the upfront charges. Indeed, new comment 107(a)(12)(ii)–6 enhances users' ability to examine the relationship between components of credit pricing by clarifying how to report net lender credits provided to the applicant. For example, without information about net lender credits, transactions where a borrower accepted a lender credit at origination in exchange for a higher interest rate would appear to have inflated prices. Moreover, by generally covering all upfront fees and credits regardless of how they are structured and denominated, final § 1002.107(a)(12)(ii) limits financial institutions' opportunity to shift fees to excluded charges by giving similar fees different names. Thus, final § 1002.107(a)(12)(ii) will enable users to better understand pricing disparities and identify potential business and community development opportunities.

The Bureau disagrees with commenters who claimed that information about total origination charges would not have value. Although such charges are affected by factors not included in the 1071 data, final § 1002.107(a)(12)(ii) will still provide insight into pricing in the small business lending market. General information about upfront charges will enable users to better understand fair lending disparities, even if they cannot conclusively determine the existence of unlawful disparities from the data alone. And users need not attempt to make precise comparisons among individual applicants to identify business and community development needs and opportunities. Regarding broker fees, the Bureau believes that such charges are an important component of the upfront cost of credit and notes that Regulation Z also includes them in the finance charge. Also, broker fees are separately itemized in final § 1002.107(a)(12)(iii) so that users who are concerned about the impact of including broker fees can deduct them from the total origination charges.

Regarding commenters' concerns about burden, the Bureau understands that some financial institutions find calculation of the finance charge in Regulation Z § 1026.4—which is similar to final § 1002.107(a)(12)(ii)'s description of total origination charges—to be complex. But final § 1002.107(a)(12)(ii) is simpler in several important respects. First, final § 1002.107(a)(12)(ii) excludes all credit costs occurring after origination of a covered credit transaction, such as interest and time-price differential. And final § 1002.107(a)(12)(ii) adopts a more inclusive approach to upfront charges than Regulation Z's finance charge, which has numerous provisions addressing specific fees. This simplified approach should make the total origination charges less burdensome to calculate than the finance charge. Regarding a commenter's question about the treatment of a borrower's premium for property insurance, this charge is handled using the general approach to charges for other products or services described in comment 107(a)(12)(ii)–4: such charges are included in the total origination charges only 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.

The Bureau is not making certain specific changes to the total origination charges data field suggested by commenters. First, final § 1002.107(a)(12)(ii) maintains the exclusion for charges imposed uniformly in cash and credit transactions, similar to the exclusion in Regulation Z's finance charge, because the Bureau believes that pricing data better serves section 1071's statutory purposes when it focuses on the cost of credit that the lender is imposing rather than capturing all costs that may be associated with a particular transaction (whether financed or not). Furthermore, the Bureau is not excluding charges simply because a financial institution imposes them uniformly on all applicants for credit. Even if such charges—given their uniformity—were to hold no value for fair lending analysis, they would still be part of the upfront cost of credit that data users may wish to examine in identifying business and community development needs and opportunities. Final § 1002.107(a)(12)(ii) also adopts the proposal's treatment of third-party charges, with such charges being reportable only if a financial institution either 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 retains a portion of the third-party charge, to the extent of the portion retained. This approach focuses final § 1002.107(a)(12)(ii) on those upfront third-party charges that are effectively set by the lender as a cost of credit. The Bureau believes this approach is consistent with that requested by commenters who did not want third-party charges to be reportable if they were outside of a financial institution's control. Regulation Z's finance charge definition uses a similar standard for third-party charges, and the Bureau is not aware of significant confusion over its applicability. Finally, Regulation C's definition of total origination charges, which is taken directly from the amount disclosed to borrowers of closed-end consumer credit transactions secured by real property, is limited in ways that the Bureau believes would reduce the value of final § 1002.107(a)(12)(ii) in the small business lending context. For example, new comment 107(a)(12)(ii)–6 clarifies that financial institutions may report a negative amount to reflect a net credit provided by the lender, but such credits could not be included in Regulation C's total origination charges data point.

107(a)(12)(iii) Broker Fees

Proposed Rule

Proposed § 1002.107(a)(12)(iii) would have required 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 have provided an example of reporting different types of broker fees. Proposed comment 107(a)(12)(iii)–2 would have clarified that financial institutions would use a “best information readily available” standard regarding fees paid directly to a broker by an applicant.

The Bureau sought 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.

Comments Received

The Bureau received comments specifically regarding broker fees from several lenders, trade associations, and community groups. A community group stated that information about broker fees would help data users monitor for abusive practices. Conversely, a group of trade associations asserted that the Bureau had not established that broker fees were inflating the cost of credit in the small business lending market. This commenter also speculated that Congress was unconcerned with broker fees in this market because it had not extended certain TILA protections to commercial transactions or explicitly identified broker fees in section 1071.

Several commenters addressed the reporting of broker fees paid directly to the broker. A trade association commented that the amount of such fees may be difficult for a financial institution to obtain, while a bank said that documenting efforts to verify direct broker fees would be burdensome. A community group said that the Bureau's proposed “best information readily available” standard was reasonable, while a joint letter from community groups and business advocacy groups asked the Bureau to separately itemize indirect broker fees in order to provide more information about charges that are imposed by the lender.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(a)(12)(iii) and associated commentary as proposed. As with all aspects of pricing within § 1002.107(a)(12), this requirement to report broker fees applies to credit transactions that either have been originated or have been approved by the financial institution but not accepted by the applicant.

As discussed in the NPRM, loan brokers play an important role in the small business lending market. The market has shifted to include more nonbank and nontraditional lenders offering different types of financial products, which creates opportunities for intermediaries, such as brokers, who might assist applicants in navigating among potential lenders or products. These intermediaries offer benefits to applicants but also create risks for those applicants arising from misaligned incentives. Indeed, the small business lending market lacks certain substantive protections against misconduct that are found in the consumer credit market, such as the prohibition on basing certain loan originator compensation on the terms of a transaction.

Information about broker fees will help data users better understand the small business lending market in general and the impact broker fees have on credit pricing in particular. Although broker fees are included in final § 1002.107(a)(12)(iii)'s definition of total origination charges, separately enumerating the total broker fees will allow data users to better understand the role that brokers play in the price of small business credit. For example, data users will be able to analyze whether broker fees specifically appear to be creating fair lending risk or higher-priced transactions for certain communities. Empowering data users to engage in this level of analysis will aid in fulfilling both the fair lending enforcement and business and community development purposes of the statute.

The Bureau acknowledges the lack of data regarding the extent to which broker fees may or may not be inflating the cost of credit. This insufficiency, however, is exactly what 1071 data are intended to help address. Moreover, final § 1002.107(a)(12)(iii) is valuable to data users even in the absence of any problematic pricing practices regarding brokers because it will help shed light on an important aspect of commercial financing arrangements. The final rule includes numerous data points, including much of the pricing data point, that do not capture information that about intrinsically or especially abusive conduct, but that will help data users identify fair lending concerns and identify business and community development needs and opportunities. Regarding Congress's intent, the Bureau notes that section 1071 expressly 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].” As discussed herein, final § 1002.107(a)(12)(iii) satisfies this requirement.

The Bureau understands that financial institutions often may not have complete access to information regarding the amount of broker fees that an applicant pays directly to a broker. Thus, final comment 107(a)(12)(iii)–2 clarifies that a financial institution may rely on the best information readily available to the financial institution at the time final action is taken. Information readily available can 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 Bureau believes commenters may be overestimating the burden associated with this standard, which contemplates only consulting information “readily” available rather than performing a searching inquiry into the amount of direct broker fees. As noted in the NPRM, the same standard is used for reporting certain HMDA data under Regulation C, and it does not appear to be unduly burdensome in that context. Additionally, many nonbank financial institutions will need to determine the amount of broker fees in certain circumstances to comply with State commercial financing disclosure laws.

Finally, the Bureau is not requiring separate itemization of indirect broker fees at this time. Such fees could be imposed for a variety of reasons and in a variety of ways; the Bureau believes that additional information and stakeholder feedback would be beneficial before adopting such a requirement.

107(a)(12)(iv) Initial Annual Charges

Proposed Rule

Proposed § 1002.107(a)(12)(iv) would have required 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 have provided an example of how to calculate the amount to report. Proposed comment 107(a)(12)(iv)–2 would have highlighted that a financial institution should exclude interest expenses from the initial annual charges reported. Proposed comment 107(a)(12)(iv)–3 would have noted 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 have provided 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 have clarified 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 sought 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. The Bureau also sought comment on the likelihood that financial institutions 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 section 1071. Finally, the Bureau sought comment on how it should treat situations where the applicant has informed the financial institution that it expects to regularly incur “avoidable charges,” and whether such charges should be reported as a scheduled charge.

Comments Received

The Bureau received comments specifically regarding the collection of initial annual charges from lenders, trade associations, and community groups.

A community group stated that the Bureau should finalize the provision as proposed, but that the Bureau should conduct research to determine if lenders are shifting fees beyond the first year. Several community groups and a lender requested that the Bureau require financial institutions to also report charges scheduled to be imposed after the first year to avoid encouraging lenders to impose charges disproportionately in the later years of the loan's term.

With respect to avoidable fees, a community group stated that the Bureau should include all fees that could be imposed at the lender's discretion in order to avoid evasion. A bank and a joint letter from bank trade associations argued that including avoidable fees that the applicant intends to incur would unfairly inflate the prices of some loans and create documentation problems for lenders. One commenter asserted that, for loans with terms shorter than one year, financial institutions should not be made to speculate as to what constitutes the initial period on short term loans and what could occur during the initial annual period regarding charges.

A State bankers association expressed concern that the terms “scheduled” and “initial period following origination” were not defined in the NPRM. That commenter and a bank asserted that many charges that may be incurred during the first year may be uncertain, such as an inspection fee for a construction project where the timing of inspections is determined by events occurring after origination. The State bankers association also stated that some loans may have multiple transactions within a one-year period, such as a line of credit that was originated and then increased, and asserted that it is unclear whether associated charges would be reported twice or combined.

Final Rule

For the reasons set forth herein, the Bureau is adopting § 1002.107(a)(12)(iv) and associated commentary with additions and adjustments to commentary to address comments regarding speculative charges and transactions with terms of less than one year. Final § 1002.107(a)(12)(iv) provides that a financial institution reports only charges scheduled to be imposed over the first annual period of the covered credit transaction. The Bureau understands that there are a variety of ways that small business credit transactions may be structured. This includes, for example, 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 that scheduled fees may constitute a substantial part of the cost of a covered credit product, and without knowledge of those fees, the cost of the credit would be incomplete. The Bureau believes that final § 1002.107(a)(12)(iv) enables 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.

There may be small business credit transactions that do not include an interest rate, but do include a monthly finance charge. If the financial institution were only required to report the interest rate on these types of transactions, the true cost of credit would be obscured because the monthly finance charge would not be reported. In addition, small business credit, like consumer credit, may include a number of other fees, such as annual fees and other similar charges. The information collected and reported under final § 1002.107(a)(12)(iv) allows data users to have a more complete picture of the cost of the covered credit transaction and promotes market transparency, thus furthering the business and community development purpose of section 1071. In addition, this pricing data furthers the fair lending purpose of section 1071 as it enhances the ability to understand the cost of credit and any disparities that may exist.

The Bureau believes that by requiring only 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 were to make an educated guess as to what unscheduled charges will be imposed over the first annual period. Final § 1002.107(a)(12)(iv) does not require a financial institution to itemize the charges reported thereunder. The Bureau also believes that requiring charges to be itemized would 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.

A financial institution complies with final § 1002.107(a)(12)(iv) by not including charges for events that are avoidable by the applicant; this restriction is explained more fully in final comment 107(a)(12)(iv)–3 (unchanged from the proposal), which provides 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 reduce 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 final comment 107(a)(12)(iv)–1. Additionally, to address comments received regarding uncertain or speculative charges, the Bureau has revised final comment 107(a)(12)(iv)–1 to state explicitly that, in a transaction where there will be a charge in the initial annual period following origination but the amount of that charge is uncertain at the time of origination, a financial institution complies by not reporting that charge as scheduled to be imposed during the initial annual period following origination.

The Bureau is finalizing comments 107(a)(12)(iv)–2 (providing that a financial institution complies with the provision by excluding any interest expense from the initial annual charges reported) and –4 (providing examples of charges scheduled to be imposed during the initial annual period) as proposed. The Bureau is also finalizing comment 107(a)(12)(iv)–5 as proposed. This comment provides 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, final § 1002.107(a)(12)(iv)–5 requires the financial institution to report the non-discounted amount to maintain consistency across the data that are reported by all financial institutions.

The Bureau is adopting new comment 107(a)(12)(iv)–6 to clarify that, for a transaction with a term less than one year, a financial institution complies with the provision by reporting all charges scheduled to be imposed during the term of the transaction. This comment was added to address requests for clarification regarding how to report the data for transactions with terms less than one year as well as what is meant by initial annual period.

107(a)(12)(v) Additional Cost for Merchant Cash Advances or Other Sales-Based Financing

Proposed Rule

Proposed § 1002.107(a)(12)(v) would have required financial institutions to report additional cost data for merchant cash advances 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 have provided an example of the difference between the amount advanced and the amount to be repaid for a merchant cash advance.

The Bureau sought comment on proposed § 1002.107(a)(12)(v) and its commentary, including whether to require additional pricing information for merchant cash advances, and whether merchant cash advances could be structured in ways that evade the proposed reporting requirement, such as by omitting or making variable the amount to be repaid.

Comments Received

The Bureau received comments specifically regarding this aspect of the proposal from several industry and community group commenters. Several joint letters from community groups, community oriented lenders, and business advocacy groups, as well as a trade association, asked the Bureau to require reporting the loan term for merchant cash advances or other sales-based financing transactions. These commenters stated that the loan term was necessary to compare the pricing of merchant cash advances, and offered potential methodologies for estimating unknown loan terms, including those from State commercial financing disclosure laws. A lender asked the Bureau to accommodate future transaction types by allowing financial institutions to report amounts under § 1002.107(a)(12)(v) even if the transaction is not a merchant cash advance or other sales-based financing transaction. Finally, a cross-sector group of lenders, community groups, and small business advocates agreed that § 1002.107(a)(12)(v), along with the other pricing data, would capture the cost of merchant cash advances.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(a)(12)(v) and comment 107(a)(12)(v)–1 as proposed. Final § 1002.107(a)(12)(v) requires financial institutions to report the difference between the amount advanced and the amount to be repaid, expressed in dollars, for merchant cash advances or other sales-based financing transactions. As with all aspects of pricing within final § 1002.107(a)(12), this requirement applies to credit transactions that either have been originated or have been approved by the financial institution but not accepted by the applicant.

As discussed in the NPRM, some types of commercial financing contain pricing terms that are difficult to reflect in data about interest rate and fees. For example, under a typical merchant cash advance, a merchant receives a cash advance and promises to repay it (plus some additional amount) to the merchant cash advance provider. Merchant cash advance providers generally do not provide an interest rate, and while they may charge fees at origination or during the first year, the majority of a merchant cash advance's cost to the merchant comes from the additional amount repaid by the merchant on top of the amount advanced. 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 final § 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 final § 1002.107(a)(12)(ii) or (iv). Without an additional pricing data field to capture this additional amount along with any other fees the merchant cash advance provider charges, data users attempting to analyze merchant cash advance pricing would miss most of the cost of credit associated with these transactions. Therefore, the inclusion of this data field aids in fulfilling both the fair lending enforcement and business and community development purposes of the statute.

The Bureau believes that collecting and reporting this data will impose relatively little burden on financial institutions, because they can determine the additional amount repaid by computing the difference between the amount of revenue purchased and the purchase price typically found in the merchant cash advance contract. Commenters generally did not make assertions to the contrary.

As discussed in the section-by-section analysis of § 1002.107(a)(5) above, the Bureau is requiring, for merchant cash advances and other sales-based financing transactions, that financial institutions report the loan term, if any, that the financial institution estimated, specified, or disclosed in processing or underwriting the application or transaction. This information will allow data users to better understand and use the information reported pursuant to final § 1002.107(a)(12)(v). However, the Bureau is not adopting one commenter's suggestion regarding future transaction types that may resemble merchant cash advances or other sales-based financing, as the Bureau believes such transactions should be adequately covered by the “other sales-based financing” label and thus this information would be reportable for such transactions.

107(a)(12)(vi) Prepayment Penalties

Proposed Rule

Proposed § 1002.107(a)(12)(vi)(A) would have required 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 have required 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 have provided 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 sought 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 more accurately reflect the cost of covered credit transactions. The Bureau also sought 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.

Comments Received

The Bureau received comments regarding the reporting of prepayment penalty information from lenders, trade associations, and community groups. A number of community groups supported the proposal to collect prepayment penalty information. One asserted that information on prepayment penalties is important for data users to determine whether such charges are targeting underserved borrowers. Another noted that research by the Federal Reserve Board shows that many small business borrowers do not expect the balloon finance charge that many merchant cash advances and other transactions impose for prepayment. A joint letter from community and business advocacy groups requested that the Bureau ensure that financial institutions cannot evade the reporting requirement by changing how prepayment penalties are described.

A number of trade associations and banks questioned the necessity of prepayment penalty data and claimed that it would be misleading. A group of trade associations stated that the Bureau offered no evidence that these penalties impact community development or are used in a discriminatory fashion. The same commenter also asserted that nearly all merchant cash advance providers collect a charge for prepaying the amount advanced, but this charge would not be reflected in the proposed prepayment penalty data point, leading to the data appearing to inflate the apparent cost of non-merchant cash advance credit. A State bankers association asserted that nondiscriminatory reasons exist for certain loans to have prepayment penalties even if a lender's general policies and procedures do not provide for them, so the reported data could not be used to detect steering. A bank stated that the proposal would not detect steering because it does not clarify whether the prepayment penalty applies to the transaction requested or the transaction approved.

Two trade association comments asserted that lending policies are written in general terms and do not address prepayment penalties. Another trade association commented that it is possible that every loan “could” have a prepayment penalty.

A number of commenters requested that the Bureau change the scope of the data collection. A lender stated that the data collection should be limited to a binary flag and not require details on the potential penalties themselves. Two banks and a State bankers association stated that the data collection should be limited to whether a prepayment penalty was actually charged because a lender's policies might change during the reporting year and are dependent on external factors, such as the requirements of a third-party guarantor. A joint letter from community and business advocacy groups asserted that the Bureau should require reporting of the amount of any prepayment penalty and the term over which the penalty could be imposed. Finally, a cross-sector group of lenders, community groups, and small business advocates stated that the data collection should be modified to capture the balloon finance charge that nearly all merchant cash advances, and many other small business loans, charge on prepayment. This commenter stated that, because this charge is the finance charge that would be paid over the original term of the loan, it would not be considered a “penalty.”

Final Rule

For the reasons set forth herein, the Bureau is adopting final § 1002.107(a)(12)(vi) with one technical correction, adopting comment 107(a)(12)(vi)–1 as proposed, and adding new comment 107(a)(12)(vi)–2 regarding charges that become due immediately on prepayment. Final § 1002.107(a)(12)(vi)(A) requires a financial institution to report whether it 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 (notwithstanding whether such a provision was in fact included in this specific credit transaction). Final § 1002.107(a)(12)(vi)(B) requires financial institutions to report whether the terms of the covered credit transaction do in fact include such a charge. These provisions allow data users to determine what percentage of covered credit transactions could contain a prepayment penalty term, what percentage of such transactions actually contain such a term, and, together with other data points, the demographic profile of borrowers whose contracts do and do not include the term. 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.

Final comment 107(a)(12)(vi)–1 elaborates 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 institution 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 reduces the possibility that potential fair lending risk is incorrectly identified. In response to commenters who said that financial institutions' policies may change during the reporting year, the Bureau notes that comment 107(a)(12)(vi)–1 explains that the relevant policies and procedures are those in effect at the time of the covered credit transaction. A financial institution would not report based on different policies and procedures that might be adopted later in the reporting period.

New comment 107(a)(12)(vi)–2 explains that a financial institution complies with final § 1002.107(a)(12)(vi) by reporting as a prepayment penalty any balloon finance charge that may be imposed for paying all or part of the transaction's principal before the date on which the principal is due and provides an example which illustrates a balloon finance charge that should be reported. As explained above, one commenter stated that most merchant cash advances and many other transactions have finance charges that would be paid over the entire term of the loan but that immediately become due on prepayment. The Bureau agrees that it was not sufficiently clear that these balloon finance charges would have been covered under the proposed description of a prepayment penalty. In addition, another commenter asked the Bureau to make clear that financial institutions cannot evade the reporting requirement by changing how prepayment penalties are described. New comment 107(a)(12)(vi)–2 was added to address both of these concerns.

In response to commenters asserting that prepayment penalty data are unnecessary or misleading, the Bureau notes 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 are more frequently entering into contracts containing prepayment penalties. From a market competition standpoint, financial institutions may want to know how frequently their competitors are using prepayment penalties, and collection of these data could improve market transparency and new product development opportunities. The Bureau is not convinced by commenters' assertions that the data will not be valuable nor that it should require reporting of additional data related to prepayment penalties. The Bureau believes the type of data required to be reported pursuant to final § 1002.107(a)(12)(vi) strikes the right balance between collecting information helpful to analyze for the purposes mentioned above and not requiring financial institutions to provide information regarding prepayment penalties.

107(a)(13) Census Tract

Proposed Rule

Section 1071 requires financial institutions to collect and report “the census tract in which is located the principal place of business of the . . . applicant.” 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. 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 from those coordinates one can identify 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.

The Bureau proposed § 1002.107(a)(13) to require financial institutions to collect and report the census tract data point using a “waterfall” approach. The proposed rule would have required 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 have required 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 did not specifically require it, the Bureau assumed that financial institutions or their vendors would generally use a geocoding tool to analyze the appropriate address to identify a census tract number.

The proposed approach would have required a financial institution to report the census tract of the proceeds address if it was available but would not have required a financial institution to ask about it specifically. Financial institutions would have been able to apply the waterfall approach to the addresses they were currently collecting; they would not have been required to specifically ask for the proceeds or headquarters addresses. In addition, the proposed method would have allowed a financial institution to report that it was unsure about the nature of the address if it had no information as to the nature or function of the business address it possessed.

Proposed comment 107(a)(13)–1 would have provided general instructions on using the waterfall reporting method, with examples for guidance. The Bureau believed that this comment would facilitate compliance and sought comment on whether any additional instructions or examples would be useful.

Proposed comment 107(a)(13)–2 would have explained that a financial institution would comply 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 have made clear that a financial institution would not be required to investigate beyond its standard procedures as to the nature of the addresses or locations it collects.

Proposed comment 107(a)(13)–3 would have explained that pursuant to proposed § 1002.107(c)(1) a financial institution would be required to maintain procedures reasonably designed to collect applicant-provided information, which would include at least one address or location for an applicant for census tract reporting. However, the comment would have further explained that if a financial institution was nonetheless unable to collect or otherwise determine any address or location for an application, the financial institution would report that the census tract information was “not provided by applicant and otherwise undetermined.”

The Bureau proposed a safe harbor in § 1002.112(c)(1) (renumbered as § 1002.112(c)(2) in the final rule), which would have stated that an incorrect entry for census tract would not be 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 have cross-referenced that provision. See the section-by-section analysis of § 1002.112(c)(2) below for additional discussion of this safe harbor.

During the SBREFA process, some small entity representatives explained that they generally collect the main office address of the small business, which for sole proprietorships will often be a home address, and were generally not aware of the proceeds address. The Bureau's proposed waterfall approach would accommodate this situation by allowing financial institutions to report census tract using the address that they currently collect. While several small entity representatives were already geocoding applicants' addresses, others 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 sought 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 small entity representative's request for a Federal government tool capable of batch processing for geocoding of addresses, the Bureau noted that it was considering the utility of such a tool. As the SBREFA Panel recommended, the Bureau sought comment on the feasibility and ease of using existing Federal services to geocode addresses in order to determine census tract for section 1071 reporting purposes (such as what is offered by the FFIEC for use in reporting HMDA and CRA data).

The Bureau sought comment on its proposed approach to the census tract data point. In addition to the specific requests for input above, the Bureau noted that the waterfall method was intended to allow CRA reporters to provide the same data for both reporting regimes, but requested 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.

Comments Received

The Bureau received comments on this aspect of the proposal from numerous lenders, trade associations, community groups, and others. Several commenters supported the inclusion of the census tract data point, and many specifically discussed and supported the proposed waterfall approach to reporting. One CDFI lender stated that it currently collects this information for the CDFI Fund. Several community groups discussed the importance of knowing where loans were made to combat redlining and ensure that socially disadvantaged farmers and other small businesses can have appropriate access to credit. A community group and a trade association agreed with the Bureau's proposal that the waterfall method would allow section 1071 reporting to match CRA requirements. Another trade association said that financial institutions would be able to use an address provided by the applicant and agreed that reporting of the proceeds address would allow coordination with CRA, though it did not comment on the proposed waterfall. Although they supported the waterfall approach, two community groups requested that financial institutions be required to ask for the location where the proceeds of the credit would be used, stating that this method would allow for better coordination with CRA and better fulfillment of the purposes of section 1071.

Several industry commenters stated that the census tract data point would be confusing and difficult to report. One commenter pointed out that multiple applicant addresses and address changes for applicants would complicate reporting. A national auto finance trade association stated that its members do not work with census tracts and that technical and process changes would be necessary to deliver this data.

A trade association stated that geocoding will be a significant burden for many credit unions, the vast majority of which do not collect census tract information for small business loans. That commenter further stated that although some CDFI credit unions collect census tract information, many are completely unfamiliar with census tracts—particularly credit unions that are not HMDA reporters. The commenter also said that the FFIEC geocoder does not permit batch inputs, which it said further slows application processes. Finally, the commenter requested that the Bureau develop a free tool that permits batch inputs and better enables efficient and cost-effective compliance.

Two banks and a trade association commented that many banks that are not HMDA reporters are unfamiliar with census tracts. Commenters also stated that the FFIEC geocoder works efficiently for addresses in and close to metro areas, but not as easily for more rural addresses, and in relation to new subdivisions and developments. They further pointed out that when an address is not “matched” in the FFIEC system, it requires manual plotting, which is time-consuming and difficult, and stated that a bank that makes strictly agricultural loans might find many non-matching addresses. Finally, two of these commenters suggested that reporting the State and county codes should be sufficient when there is no match in the FFIEC geocoder.

Several industry commenters specifically objected to the waterfall reporting method, which they stated was confusing and difficult, and many suggested it should not be mandatory. Some of these commenters requested clarification on how to report if there are multiple proceeds addresses, or if the bank learns of a different proceeds address after the loan closes. In addition, two commenters asked that the Bureau clarify whether the census tract should match the mailing address of the applicant or the physical address.

Numerous banks and trade associations stated that section 1071 reporting requirements, especially the census tract data point, overlapped or conflicted with HMDA and CRA reporting requirements, creating unnecessary difficulties. Most of these commenters asked that the Bureau coordinate these requirements and provide a complete exemption from section 1071, HMDA, or CRA for loans that overlap. Commenters requesting exemptions did not explain why the use of the proceeds address would not allow coordination between section 1071 and CRA census tract reporting.

Some industry commenters expressed concern that census tract information, especially when combined with the NAICS business type and other reported data, could facilitate reidentification of small business applicants. These commenters stated that this risk would be greater in rural areas.

Comments addressing the Bureau's proposed safe harbor for use of certain geocoders are addressed in the section-by-section analysis of § 1002.114(c)(1) below.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(a)(13) and associated commentary with a minor edit for clarity. Final § 1002.107(a)(13) requires that financial institutions collect and report the census tract data point using the “waterfall” approach described above.

In regard to the comments expressing concern about the burden associated with collecting and reporting census tract information using a geocoder and by other means, the Bureau notes that census tract is specifically enumerated as a data point in the statute. In addition, the Bureau believes that its reporting method for the census tract data point leverages existing industry information collection practices and will result in useful information to further section 1071's purposes while avoiding imposing much additional burden on financial institutions. The waterfall method allows a financial institution to report census tract using an address it already has, with no further investigation; allows a financial institution to avoid further investigation when it is unsure about the nature of the address reported; and allows current CRA reporters to report the same address for this rule as they do for CRA. In addition, the waterfall method prioritizes the proceeds address, which the Bureau considers to be particularly useful for both the fair lending and business and community development purposes of section 1071.

The waterfall approach adopted in the final rule requires a financial institution to report the census tract of the proceeds address if it is available, but does not require a financial institution to ask about it specifically. This provision is meant to address potential concerns about reporters spending time on complex, fact-specific questions and unintentionally misreporting this data point, which could occur if financial institution staff have to determine what kind of address they are reporting based on insufficient information. The Bureau believes that this option will be particularly helpful if the application is denied or withdrawn early in the application process before the nature of any address provided by the applicant is clear.

Requiring financial institutions to inquire as to the address where the proceeds will be applied, as some commenters requested, might result in slightly more proceeds addresses being reported. However, the Bureau does not believe that the extra information reported in certain instances would be worth the extra difficulty across all small business applications. In addition, the Bureau believes that the waterfall approach in collecting census tract data provides sufficient flexibility; making use of the waterfall voluntary, as some commenters suggested, would result in less useful information being collected while only reducing difficulty by a small amount. In regard to the comment asking whether the physical or mailing address or location should be used, the Bureau notes that the credit proceeds will be applied at a physical location, and the main office or headquarters of a business will also occupy a physical location. The third option in the waterfall, “another address or location,” does not suggest the nature of such an address, but the financial institution will need to have enough information to determine a census tract for that location.

As explained above, the Bureau understands that CRA currently requests 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 will be able to coordinate the two compliance regimes to report the same census tract. The commenters who stated that this data point would conflict with CRA reporting did not explain why they believed this to be so, and other industry commenters agreed that the census tract data point for section 1071 would allow coordinated reporting with CRA. The Bureau also notes that the recent CRA interagency proposed rule, if finalized, would eventually replace CRA small business and small farm data with data collected pursuant to section 1071, in which case this issue would likely be moot.

Although the Bureau sought comment on the differences between HMDA and CRA census tract reporting, no commenters provided information on this issue. In regard to commenter concerns about overlaps or conflicts with HMDA reporting, the Bureau notes that the final rule excludes HMDA-reportable transactions from coverage, as discussed in the section-by-section analysis of § 1002.104(b)(2) above, so that concern is now moot as well.

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.” The Bureau considers the waterfall approach in final § 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 anticipates that, generally, the address where the loan proceeds will be applied will also be the main office or headquarters address. The primary exception to this principle will be in the case of credit intended for purchase, construction/improvement, or refinancing of real property; under these circumstances, the Bureau reasonably interprets the term “principal place of business” to mean the principal location for business activities relating to the extension of credit at issue. Although “another address or location associated with the applicant” might 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 will 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 activity financed 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 will 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 location for fair lending analysis and understanding where the business and community development will likely be occurring. In addition, requiring data on the nature of the address reported will 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, to the extent that “the principal place of business of the . . . applicant” is understood to mean only “main office or headquarters address” (which, as explained above, the Bureau does not adopt as its interpretation of the statutory term) the Bureau believes it is appropriate to use its exception authority under ECOA section 704B(g)(2) to provide that financial institutions in certain situations may report the proceeds address or “another address or location associated with the applicant,” because the Bureau believes those addresses will carry out the purposes of section 1071 more appropriately than requiring the main office or headquarters address in every situation.

The Bureau is finalizing comment 107(a)(13)–1 through –4 with a minor edit for consistency. Comment 107(a)(13)–1 provides general instructions on using the waterfall reporting method, with examples for guidance, which will facilitate compliance.

Final comment 107(a)(13)–2 explains that 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. The comment also makes 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. In regard to commenters' concerns about reporting census tract when there are multiple proceeds addresses, the Bureau notes that the rule requires reporting using the address where the proceeds will be or would have been principally applied, and allows for other addresses to be used if that address is unknown. As final comment 107(a)(13)–2 makes clear, as long as a financial institution determines which address to use in good faith, it will be in compliance with the rule. The Bureau believes that including detailed instructions on how to determine which proceeds address to report would increase the difficulty of reporting while only marginally enhancing the quality of the data reported. In regard to the comment about what to report when the proceeds or other address changes, because comment 107(a)(13)–2 requires that the address/location be identified in good faith, an address that the financial institution knows is no longer accurate would not be appropriate to use in determining the census tract when a more accurate address is available.

Final comment 107(a)(13)–3 explains that pursuant to final § 1002.107(c)(1) a financial institution is required to maintain procedures reasonably designed to collect applicant-provided data, which includes at least one address or location for an applicant for census tract reporting. However, the comment further explains 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 was “not provided by applicant and otherwise undetermined.” Based on the Bureau's understanding of financial institutions' application procedures, the Bureau believes it is highly unlikely that a financial institution will not obtain some type of address for the applicant. Nonetheless, the Bureau permits 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 final § 1002.107(c)(1) makes 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 strikes the right balance by facilitating compliance and also emphasizing the requirement to collect appropriate data.

Final comment 107(a)(13)–4 cross-references a safe harbor the Bureau is finalizing in § 1002.112(c)(2), which states that an incorrect entry for census tract will not be a violation of ECOA or subpart B if the financial institution obtains the census tract by correctly using a geocoding tool provided by the FFIEC or the Bureau. See the section-by-section analysis of § 1002.112(c)(2) below for additional discussion of this safe harbor. In regard to commenters' requests for a new Federal geocoding tool that allows for batch processing, the Bureau continues to explore this option.

Finally, as discussed above, some commenters were concerned about reidentification risk in regard to census tract reporting, especially when combined with NAICS industry codes and other data, and especially in rural areas. The Bureau appreciates concerns regarding the potential re-identification risk posed by the publication of unmodified census tract data. Accordingly, the Bureau believes that, if it decides to publish census tract, modification may be appropriate to mitigate potential re-identification risk to small business applicants and related natural persons. The Bureau notes that it will consider carefully what data will be publicly released, and will carefully protect applicant privacy, while preserving the utility of the dataset. See part VIII.B.6.xi below for discussion of this issue.

107(a)(14) Gross Annual Revenue

Proposed Rule

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.”

Proposed § 1002.107(a)(14) would have required reporting of the gross annual revenue of the applicant for its preceding full fiscal year prior to when the information is collected. The Bureau proposed to require reporting of a specific value for gross annual revenue—rather than a range—to simplify the reporting of gross annual revenue information for financial institutions and because it believed that a precise value would be more useful for data users, including the Bureau.

Proposed comment 107(a)(14)–1 would have clarified that a financial institution need not verify gross annual revenue information provided by the applicant to comply with proposed § 1002.107(a)(14), as some small entity representatives and other stakeholders suggested. The proposed comment would have explained 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 have also stated, however, that if the financial institution verifies the gross annual revenue provided by the applicant, it must report the verified information. The Bureau believed 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 revenue currently. The Bureau also did not believe that such a requirement was necessary in fulfilling either of section 1071's statutory purposes. However, the Bureau believed that reporting verified gross annual revenue when the financial institution already possesses that information would not be operationally difficult and would enhance the accuracy of the information reported.

Proposed comment 107(a)(14)–1 would have also provided specific language that a financial institution could use to ask about an applicant's gross annual revenue and would have explained that a financial institution could rely on the applicant's answer. The Bureau believed 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 small entity representatives and other stakeholders suggested.

Overall, the Bureau believed 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.

The Bureau believed 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 proposed comment 107(a)(14)–2, which would have first clarified 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 have then stated 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 believed 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 have clarified 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 have stated 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 believed 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 have concluded 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. This approach regarding affiliate revenue in proposed comment 107(a)(14)–3 was consistent with the approach regarding affiliate revenue for purposes of determining whether an applicant is a small business under proposed § 1002.106(b). The Bureau believed that this operational equivalence between proposed § 1002.107(a)(14) and proposed § 1002.106(b) would facilitate compliance and enhance the consistency of the data.

In the NPRM, the Bureau expressed skepticism regarding some small entity representatives' suggestions to allow estimation or extrapolation of gross annual revenue based on partially reported revenue, noting, for example, that a seasonal business's bank statements for its busy season would likely yield an inflated gross annual revenue when extrapolated to a full year. The Bureau sought 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 noted that estimation or extrapolation of gross annual revenue would be 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 sought 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 sought 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 sought comment on the effect of cash flow versus accrual accounting on reporting of gross annual revenue.

Comments Received

The Bureau received comments on its proposed approach to the gross annual revenue data point from a range of lenders, trade associations, and community groups. With the exception of several agricultural lenders, industry commenters generally did not object to the Bureau's proposal to require the collection and reporting of gross annual revenue as required by ECOA section 704B(e)(2)(F) and three commenters (two community groups and a lender) expressed support for the proposed gross annual revenue data point. One of the community groups asserted that the gross annual revenue of the small business is a critical data element since research shows that smaller businesses are less likely to receive loans and that this data point is needed to assess whether banks are meeting credit needs of small businesses. The other community group remarked that it was critically important to allow for analysis looking at smaller buckets of small businesses based on gross revenue.

Several agricultural lenders, echoing comments from a major agricultural credit trade association, argued that the Bureau should not require the collection or reporting of gross annual revenue information for agricultural credit and urged the Bureau to use its exception authority to eliminate this data point for agricultural credit. The commenters argued that collecting gross annual revenue information would pose substantial challenges for them given the prevalence of the “non-standard” agricultural borrower, including the majority of farmers who only farm on a part-time basis, and because many agricultural loans are currently decisioned with principal reliance on credit scoring systems, without considering revenue from farming or off-farm income. One agricultural lender explained that its underwriting standards include personal W–2 and other off-farm income, arguing that inclusion of that information in reporting this data point would be misleading as to the size of the business applying for a loan because off-farm income is not truly business income. The same commenter asserted that if, on the other hand, the off-farm income is not reported, the data would be misleading as they would show many loans approved to farmers with low business revenue (where they have sufficient personal income) and other loans denied to farmers with higher business revenue (because of insufficient personal income). Another commenter noted it was unclear how to calculate gross annual revenue for many agricultural credit transactions because for both estate planning and asset preservation purposes, many family farms are set up using complex business entities consisting of multiple trusts, corporations, partnerships, and limited liability entities, and that this means that the applicant signing the note may differ from the denoted mortgagors and guarantors, but all of whom are family members or business entities they own. Many of these agricultural lenders suggested that instead of gross annual revenue information, the appropriate metric for agricultural credit should be “gross sales of agricultural or aquatic products” as defined by the Farm Credit Administration in the prior year.

Some bank commenters suggested the Bureau align with other reporting regimes (such as HMDA and CRA) by adopting a definition of gross annual revenue based on annual revenue relied upon to make the credit decision. Several explained inconsistencies among regulatory approaches to gross annual revenue, pointing out the Bureau's proposal would require collecting gross annual revenue from the preceding fiscal year, whereas HMDA reporting requires use of the income considered in making the credit decision and the CRA utilizes gross annual revenue used to make the credit decision. Several commenters asserted that using a prior year's gross annual revenue would be problematic for many small businesses that cannot produce usable financial statements, including tax returns, immediately upon the close of a fiscal year. One such commenter elaborated that tax returns, which are often the only available income statements, may not be ready until September, resulting in many lenders relying on a tax return from two years ago or using a pro forma revenue outline. Another bank commenter asserted that using similar, but differently defined, data points between section 1071 and CRA would complicate the reporting process and could be avoided by aligning the definitions. One commenter recommended aligning with CRA for originated loans by using gross annual revenue used to make the credit decision, but for non-originated loans (which are not reported under the CRA) using gross annual revenue information that has been provided by applicants absent credit decisions (such as in cases of some withdrawn or incomplete applications).

Some commenters provided market intelligence related to the collection of gross annual revenue data. A trade association stated that collecting gross annual revenue information can be complicated because many small businesses have loan guarantors and co-borrowers. Another trade association explained that in the vehicle financing context, the borrower employee who is responsible for acquiring the vehicle may not be familiar with the total revenue of the company and the owner(s) of the company may not want to share this information with all employees. A few industry commenters stated that there are many instances where gross annual revenue information is not collected in the normal course of business because underwriting may be based on other factors such as a cash flow analysis, net income, or debt-to-service ratio. For this reason, one of these commenters stated that it should be clear that applicants have no obligation to provide gross annual revenue information. Another asserted that where an applicant declines to provide gross annual revenue information, the Bureau is creating a significant regulatory challenge for the financial institution by requiring it to submit application-level information when it will not know for certain whether the business is a small business nor have any reliable way of obtaining gross annual revenue information absent a third-party provider, which do not exist for many industries. Conversely, a community group stated that gross annual revenue was likely to be collected as part of the underwriting process.

A number of industry commenters requested clarification regarding how to report gross annual revenue information. A few commenters requested guidance regarding appropriate sources for gross annual revenue information. One bank commenter requested consistency in what defines gross annual revenue and asked whether gross sales listed on a tax return constitute an acceptable source for this information. Another commenter asked the Bureau to delineate whether tax returns, accountant prepared financial statements, or internal profit and loss statements constitute acceptable source documentation.

Several industry commenters asked for guidance or made suggestions regarding how to calculate gross annual revenue. One asked whether the Bureau intends for gross annual revenue to be defined as the total of all income (account credits) for the year before subtracting any expenses (account debits). Another asked whether, in the case of a business that uses a calendar year for its fiscal year and applies for a loan early in the next fiscal year with many unknown numbers related to the prior fiscal year, the applicant should provide an estimate or whether the applicant should provide the information from the next preceding fiscal year. Two commenters suggested that the Bureau clarify that different business units within the financial institution may use different methods to determine gross annual revenue, as long as the methods are used consistently within each business unit. Another asked if, in the case of an applicant that owns two or more businesses, the financial institution should only collect and report the gross annual revenue of the business being financed and not combined revenues of all owned businesses.

A number of industry commenters asked for clarification and made suggestions regarding how to report gross annual revenue for a startup business, a new line of business, or a business with a change in structure or ownership. A few commenters asked whether “zero” and/or “not available” is an acceptable response for a startup business. One commenter urged the Bureau to define gross annual revenue in a straightforward manner that does not impact credit opportunities (nor compliance) for newly formed businesses that do not have historical gross annual revenue. Another commenter suggested the Bureau address or exempt new businesses from section 1071 reporting. Two commenters asked whether “zero” or “not provided by applicant and otherwise undetermined” should be reported when a borrower is establishing a new line of business but already has revenue in other businesses; one also asked if treatment should differ based on whether or not the new business line was in the same industry as the existing businesses. A bank commenter opined that for a start-up business, the financial institution should use the actual gross annual revenue to date (including the reporting of $0 if a new business has had no revenue to date) and that pro-forma projected revenue figures should not be reported since these figures do not reflect actual gross revenue. Another bank commenter suggested the Bureau develop FAQs and other documents that applicants can consult to help them determine what number to supply for gross annual revenue, particularly when a business is starting up or establishing a new business line. Another industry commenter asked how to handle situations where there is a change in structure or ownership of the business and it is unclear how the gross annual revenue should apply to the applicant.

Two industry commenters specifically suggested changes related to how to report the gross annual revenue of single purpose entities and other real estate financing vehicles. Both suggested allowing a financial institution to rely on the gross annual revenue generated by the property or the applicant's projected gross annual revenue for purposes of determining the small business status of the applicant. One also suggested specific revisions to the commentary to incorporate its suggestions.

The Bureau also received some general comments regarding the treatment of gross annual revenue information from an applicant's affiliate. A trade association expressed support for the Bureau's proposal to clarify that a financial institution need not verify gross annual revenue information provided by the applicant and is permitted—but not required—to report the gross annual revenue for the applicant that includes the revenue of affiliates as well. Two community group comments urged the Bureau to require reporting on the gross annual revenue of parent companies and beneficial owners of limited liability companies in order to avoid obfuscating extensive property ownership.

Some industry commenters provided suggestions regarding how to handle gross annual revenue information from the parent companies or affiliates of applicants. A bank inquired whether revenue or income relied upon from co-signers or guarantors that are not affiliates of the borrower should be factored into the gross annual revenue determination. A group of trade associations suggested specific technical revisions to the commentary for clarity. Two bank commenters noted there may be inconsistencies in the data where one institution looks like it is lending more to small(er) businesses because it opts not to include gross annual revenue of affiliates. Two other commenters asked that reportable gross annual revenue be the gross annual revenue of both the applicant and all of its affiliates. A bank recommended the Bureau further explain how to handle situations where the applicant is using multiple owned businesses/affiliates to support sufficient cashflow, and whether there are repercussions for excluding/including multiple revenues used in the credit decision. A group of trade associations representing the commercial real estate industry asked the Bureau to provide additional guidance on what types of entities may be affiliates of an applicant, e.g., as a result of common ownership or common control. Another trade association suggested that the Bureau make minor revisions to commentary to clarify that a lender that does not collect affiliate revenue in all transactions is not precluded from collecting affiliate revenue in some transactions.

A few commenters specifically asked for clarity regarding the treatment of real estate affiliate revenue. These commenters explained that many of their loans are to real estate investors who often form and apply through a single‐purpose limited liability company that has no gross annual revenue (and therefore would meet the proposed definition of a small business) but that may be affiliates of many other single‐purpose limited liability companies and individual owners. These commenters noted that they typically underwrite these loans based on a schedule of other real estate in which the single purpose entity (or its sponsor) has an ownership interest and by using a global debt coverage calculation that considers the combined income of the applicant and all affiliated businesses, which can often exceed $5 million annually. A group of trade associations representing the commercial real estate industry stated that under the SBA's general principles of affiliation, the single purpose entities that own that other real estate would be affiliates of the applicant single purpose entity, because of the overlapping ownership interest. They also stated that the single purpose entities on the schedule of real estate could additionally be affiliates of the applicant single purpose entity where one or more officers, directors, managing members, or partners controls the board of directors or management of both the applicant single purpose entity and the single purpose entities on the schedule of real estate. A bank asked the Bureau to clarify that such businesses should be determined to be “small businesses” for which data collection and reporting is required only if the combined income of the business and its related affiliates does not exceed the threshold set. The group of trade associations suggested revisions to the commentary that, in the case of single purpose entities, would allow a financial institution to consider the owners of any real property listed on a schedule of real estate as affiliates of the applicant and would also, under certain circumstances, allow a financial institution to estimate the gross annual revenue of any income-producing real property for purposes of determining an applicant's small business status. They also suggested that for an applicant that is a newly created single purpose entity, a financial institution should be permitted to apply the $5 million gross annual revenue threshold to either the gross annual revenue of the property for its most recent fiscal year under its prior owner or the single purpose entity's projected gross annual revenue.

Some commenters asked for guidance or argued in favor of using estimates and extrapolations when exact gross annual revenue information is unavailable. A bank asked if using an estimate was permitted when the applicant does not have prior fiscal year information completed. Another commenter suggested that when an applicant does not provide information regarding its gross annual revenue but that applicant's revenue is tracked through a technology company's online platform ( e.g., its sales on the company's online marketplace), a covered financial institution should be able to report gross annual revenue based on revenue information obtained from the platform data. The commenter argued that permitting use of this alternative data point would serve the purposes of section 1071 by enabling technology companies to collect and report information on a greater number of applications, while also reducing the compliance burden for financial institutions. Two commenters argued that for consistency, the Bureau should allow financial institutions to extrapolate or estimate an applicant's gross annual revenue, claiming that the Bureau proposed to allow institutions (not just applicants) to rely on extrapolated or estimated revenue data for determining whether or not a business is a small business.

Many industry commenters supported the Bureau's proposal to permit financial institutions to rely upon gross annual revenue information provided by the applicant without any requirement to verify. Many of these commenters noted that they do not currently collect gross annual revenue information with every application and even if it is collected, they do not always verify the amount provided, as underwriting is often based on other factors such as a cash flow analysis or debt-to-service ratio. One commenter noted that the flexibility to use the gross annual revenue provided by the applicant and without verification allows financial institutions to continue using current, proven underwriting practices and does not add to the compliance burden by requiring additional revenue verification steps.

The Bureau received some general comments regarding its proposal to not require verification of gross annual information but to require reporting of verified information when available. Two banks requested further clarification regarding the meaning of “verification,” one of whom argued that neither the identification and assessment of income figures (not the same as gross annual revenue) by a financial institution during the underwriting and credit decision process nor the post-origination independent testing and validation of the small business data file should be considered “verification.” The other bank stated that exact gross annual revenue information is not always known until a tax return is completed and asked if the self-reported gross annual revenue information should be reported or the information found later on the tax return.

Two community groups urged the Bureau to require the verification of gross annual revenue information. One noted that tax returns are generally available and can be used to confirm the applicant's gross annual revenue information. The other asserted that because the accuracy of determining whether credit needs of small businesses are being met hinges on the accuracy of collecting and reporting the revenue size of the business and because using tax documents or cash flow information makes it feasible for the lender to verify annual revenue, the Bureau should require the verification of gross annual revenue information. This community group argued that if affiliates are not accounted for in data collection, the data could include businesses that exceed the revenue limits established by the Bureau, thereby reducing the efficacy of the data in reporting on the experiences of small businesses in the lending marketplace. The commenter suggested that the Bureau thus investigate this issue and determine whether there are feasible methods a lender can use to identify the presence of affiliates.

Some industry commenters suggested the Bureau provide a safe harbor and/or remove its proposed requirement to report verified gross annual revenue information. Commenters requested the Bureau specify that the financial institution has no responsibility to verify the number supplied by the applicant. A few commenters also suggested the Bureau institute a safe harbor to ensure that whatever gross annual revenue number is supplied by the applicant can be reported. Commenters urged the Bureau to clarify that a financial institution is not liable for misinterpretation in answering questions or providing information to the applicant beyond the proposed gross annual revenue question. One commenter suggested that if it is the lender's practice to revise the application information in its system to reflect what it believes to be a verified number, the Bureau should permit the lender to report the verified number retained in its system, rather than requiring the lender to maintain both numbers in its system. This commenter also argued that a lender's verification of revenue should not result in the lender being required to change the applicant's self-classification as being a small business or not being a small business because the determination of whether or not an applicant is a “small business” needs to be made by the applicant at the time of application.

Several community groups and a CDFI lender expressed support for reporting gross annual revenue as a specific dollar amount rather than in ranges. These commenters emphasized the importance of having precise and accurate data on gross annual revenue because this information is a fundamental determinant of whether a business is deemed to be small and all of its attendant information is captured and collected as part of the 1071 dataset. One commenter argued gross annual revenue in discrete units rather than bands was needed to assess the availability of credit to the smallest businesses, especially those owned by women and people of color. Another commenter asserted that revenue categories should be more detailed than those in the CRA small business loan data because research revealed the inadequacies with the CRA classifications since businesses with revenues below $500,000 had markedly less access to loans than businesses with revenues above this amount. This commenter argued in the alternative that should the Bureau adopt a range for gross annual revenue, it should select the mid-point with $10,000 increments as a continuous variable as the most accurate for capturing experiences of the range of small businesses in the lending marketplace.

With regard to the time frame for usability of gross annual revenue information, a bank stated that gross annual revenue information should only be usable for one fiscal year. A trade association suggested that financial institutions not be required to re-request gross annual revenue for new credit applications when they can rely on their records from previous transactions.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(a)(14) and associated commentary with revisions for clarity and consistency. Final § 1002.107(a)(14) requires reporting of the applicant's gross annual revenue for its preceding fiscal year. The Bureau is requiring that financial institutions report a specific value for gross annual revenue—rather than a range—to simplify the reporting of gross annual revenue information for financial institutions and because it believes a precise value is more useful for data users, including the Bureau. However, the Bureau has not yet determined how it will publish gross annual revenue data in the dataset. The Bureau will consider whether modification techniques, such as ranges, may be appropriate after it conducts its full privacy analysis. See part VIII below for further discussion about the privacy analysis and public disclosure of data.

The Bureau is not categorically exempting agricultural credit from the requirement to collect and report gross annual revenue, as requested by some commenters. The Bureau understands, as noted by commenters, that most farmers in this country farm on a part-time basis and that the gross annual revenue data point may pose challenges given the prevalence of “non-standard” agricultural borrowers such as customers applying jointly despite having separate farming operations. The Bureau also understands from commenters that many Farm Credit System lenders decision applications without either considering off-farm income or revenue from farming; instead, lenders rely principally on credit scoring systems. Nevertheless, the Bureau believes that omitting the gross annual revenue data point for agricultural credit transactions would introduce inconsistency in data collected across different industries and would not support section 1071's statutory purposes. The Bureau notes that data users will be able to identify agricultural credit transactions using the reported 3-digit NAICS code and make any necessary adjustments in their analyses to account for particularities unique to agricultural industries. The Bureau also believes, as discussed below, that the suggested gross annual revenue question in final comment 107(a)(14)–1 will facilitate compliance for agricultural lenders that currently do not collect gross annual revenue, particularly because the financial institution may rely on the applicant's answer. As discussed above in the section-by-section analysis of § 1002.106(b), the Bureau does not believe that “gross sales of agricultural or aquatic products” in the prior year would be an appropriate metric for agricultural credit in this final rule, nor that this should form the basis for a separate small business definition for agricultural businesses.

The Bureau has considered the comments regarding the collection and reporting of gross annual revenue and it believes its approach in final 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—will reduce commenters' concerns regarding complexity and difficulty of collecting gross annual revenue information.

Final comment 107(a)(14)–1 clarifies that a financial institution reports the applicant's gross annual revenue for the fiscal year preceding when the information was collected. The Bureau believes this will clarify the timing requirements for collection of the gross annual revenue data point. The final comment provides specific language that a financial institution may use to ask about an applicant's gross annual revenue and explains that a financial institution may rely on the applicant's answer (unless subsequently verified or updated), even if the applicant's statements or information is based on estimation or extrapolation. The Bureau believes this language will 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 commenters suggested.

Final comment 107(a)(14)–1 also clarifies that a financial institution need not verify gross annual revenue information provided by the applicant to comply with final § 1002.107(a)(14). The comment explains that the financial institution may rely on the applicant's statements or on information provided by the applicant in collecting and reporting gross annual revenue. The comment also states, however, that if the financial institution verifies the gross annual revenue provided by the applicant it must report the verified information. The Bureau understands, as noted by industry commenters, that a requirement to verify gross annual revenue would be operationally difficult for many financial institutions, particularly in situations in which the financial institution does not currently collect gross annual revenue. The Bureau does not believe that such a requirement is necessary to fulfill either of section 1071's statutory purposes. However, the Bureau believes that reporting verified revenue when the financial institution already possesses that information will not be operationally difficult and will enhance the accuracy of the information collected. For the same reasons and for the reasons outlined in its discussion of final comment 107(c)–5, the Bureau is clarifying in final comment 107(a)(14)–1 that a financial institution reports updated gross annual revenue data if it obtains more current data from the applicant during the application process. The comment states that if this updated information is on data the financial institution has already verified, the financial institution reports the information it believes to be more accurate, in its discretion.

With respect to the suggestions that the Bureau further clarify the meaning of “verify,” the Bureau believes that additional specificity in the rule itself could unnecessarily constrain financial institutions. The Bureau interprets the word “verification” to mean the intentional act of determining the accuracy of information provided, in this case for the purpose of processing and underwriting the credit application, and potentially changing that information to reflect the determination. Gross annual revenue information that may or may not be more accurate than applicant-provided data and is not part of a financial institution's verification of the file's applicant-provided data or used by the institution in processing or underwriting the application need not be reported. The Bureau agrees with the commenter who stated that post-origination independent testing and validation of the small business data file does not constitute “verification.” In situations where a financial institution verifies only a portion of the small business's provided gross annual revenue figure (perhaps because the institution is relying on that portion for its credit decision), the financial institution has not verified the entire gross annual revenue amount provided by the applicant, and it may continue to rely on the applicant's statement or information, and it need not report the partially verified information.

The Bureau does not believe it would be appropriate to use a definition of gross annual revenue for this rule based on the annual revenue relied upon to make the credit decision. Given both the statutory language requiring the collection and reporting of “the gross annual revenue of the business in the last fiscal year” and section 1071's statutory purposes, the Bureau believes that using the small business's entire gross annual revenue, which may differ from revenue relied upon in making the credit decision, is the better approach to implement this data point in final § 1002.107(a)(14). Moreover, the Bureau notes that—unlike for this final rule—a business's gross annual revenue is not determinative of either HMDA or CRA coverage. Here, the Bureau believes it is important to obtain the applicant's entire gross annual revenue for more accurate identification of business and community development needs and opportunities. The Bureau thus agrees with commenters that gross annual revenue data are important to assess the availability of credit to the smallest firms, especially those owned by women, minorities, and LGBTQI+ individuals. Moreover, for credit transactions that are underwritten without consideration or collection of a small business's gross annual revenue, no information would be reported for this data point under a relied-upon standard. Lastly, the Bureau believes it important to ensure that the gross annual revenue figure used to determine small business status is the same total figure as the gross annual revenue reported for the data point. Using different figures could create data discrepancies and disconnects and would ultimately result in greater compliance risk for financial institutions.

In addition, the Bureau does not believe that financial institutions need a safe harbor to ensure that whatever gross annual revenue number is supplied by the applicant can be reported or that it would be appropriate to remove the requirement to report verified gross annual revenue information when the financial institution in fact verifies it. Final comment 107(a)(14)–1 already clarifies that a financial institution need not verify gross annual revenue information provided by the applicant to comply with final § 1002.107(a)(14) and thus a safe harbor is not necessary to allow reporting of the gross annual revenue number supplied by the applicant. As one commenter explained, some financial institutions already revise application information in their systems with a verified gross annual revenue number and thus the Bureau does not believe that reporting verified revenue when the financial institution already possesses that information will be operationally difficult. In such situations, the financial institution may report the verified number retained in its system and is not required to maintain both numbers in its system. Moreover, the Bureau agrees with the commenter who stated that the accuracy of determining whether the credit needs of small businesses are being met hinges on collecting and reporting the revenue size of the business and thus the Bureau believes that reporting verified revenue when available will enhance the accuracy of the information collected.

With respect to requests for guidance from commenters regarding acceptable sources of gross annual revenue information, the Bureau does not believe it would be appropriate to require the use of any specific documentation. However, the Bureau notes that gross annual revenue information can be reasonably derived from a variety of sources including tax returns, accountant-prepared financial statements, internal profit and loss statements, cash flow analyses, or any type of business income documentation that the financial institution reasonably relies on in the normal course of business.

With respect to comments regarding how to calculate gross annual revenue, the Bureau notes that the suggested applicant question in final comment 107(a)(14)–1 states that gross annual revenue is the amount of money the business earned before subtracting taxes and other expenses. The comment further states that an applicant may provide gross annual revenue calculated using any reasonable method. Different business units within the financial institution may use different methods to ascertain gross annual revenue, as long as the methods are used consistently within each business unit.

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 final § 1002.106(b) through, for example, a screening question asking whether the applicant's gross annual revenue is $5 million or less, but then the financial institution is unable to collect or determine a specific gross annual revenue amount. Therefore, the Bureau is finalizing comment 107(a)(14)–2 substantively as proposed. The comment first clarifies that pursuant to final § 1002.107(c), a financial institution shall maintain procedures reasonably designed to collect applicant-provided data, including the gross annual revenue of the applicant. The final comment then states 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 will 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 gross annual revenue could not be collected.

The Bureau is finalizing comment 107(a)(14)–3 with minor revisions for clarity and consistency. The Bureau is adopting commenters' suggestions to add a cross reference to comment 106(b)(1)–3 and to remove an example provided in the proposed commentary for additional clarity. This example would have provided that 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 shares the commenter's concern that this comment may be interpreted to preclude a financial institution that does not collect affiliate revenue in all transactions from collecting affiliate revenue in some transactions and believes the comment is sufficiently clear without this example.

Final comment 107(a)(14)–3 also clarifies 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. For example, if the financial institution has not collected information on affiliate revenue, the financial institution reports only the applicant's revenue and does not include the revenue of any affiliates. The Bureau is adopting suggested revisions to comment 107(a)(14)–3 and additionally notes that a financial institution that does not collect affiliate revenue in all transactions is not precluded from collecting affiliate revenue in some transactions. The Bureau believes this comment is responsive to one commenter's question about how to report gross annual revenue for an applicant with two businesses because it permits, but does not require, reporting of gross annual revenue for an applicant that includes the revenue of affiliates, which may include a business with common ownership. Final comment 107(a)(14)–3 concludes 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 noted that final comment 106(b)–3 follows the same approach to affiliate revenue for purposes of determining whether an applicant is a small business under final § 1002.106(b). The Bureau believes that this operational equivalence between final § 1002.107(a)(14) and final § 1002.106(b) will facilitate compliance and enhance data consistency.

The Bureau recognizes, as noted by commenters, that there may be inconsistencies in the data where one financial institution looks like it is lending more to small(er) businesses as it opts not to include gross annual revenue of affiliates versus another financial institution that opts to include such revenue when it reports the gross annual revenue of an applicant. However, the Bureau is not requiring reporting of the gross annual revenue of both the applicant and all of its affiliates, nor is it requiring reporting of revenue for parent companies and beneficial owners of limited liability companies. 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. The Bureau considered whether there are feasible methods to identify the presence of affiliate revenue, as a commenter suggested, but ultimately has determined that such an identifier could interfere with allowing a financial institution to rely on an applicant's self-reported gross annual revenue information and, in any case, would introduce additional complexity into reporting. In response to a question about whether revenue or income relied upon from co-signers or guarantors that are not affiliates of the applicant should be factored into the gross annual revenue determination, the Bureau notes that the final rule only requires the collection and reporting of gross annual revenue of the applicant.

The Bureau understands there may also be instances, as indicated by one commenter, where the applicant may use multiple owned businesses/affiliates to support sufficient cashflow, and in those instances, a financial institution may rely on an applicant's representations regarding gross annual revenue that include affiliates' revenue. For additional guidance on what types of entities may be affiliates of an applicant, e.g., as a result of common ownership or common control, see the section-by-section analyses of §§ 1002.102(a) and 1002.106(b).

The Bureau has considered the comments regarding the treatment of real estate affiliate revenue, but is not adopting revisions to, in the case of single purpose entities, allow a financial institution to categorize all owners of any real property listed on an applicant's Schedule Of Real Estate Owned as affiliates of the applicant. The Bureau is likewise not adopting revisions to allow a financial institution to estimate or project the gross annual revenue of any income-producing real property for purposes of determining the applicant's small business status. The Bureau agrees that under the SBA's general principles of affiliation, “common investments” affiliation can be based on shared investments in or joint ownership of real estate. Thus, the owners of real estate that is also owned by the applicant may be affiliates of the applicant. However, the Bureau is not adopting the suggested revisions to commentary because affiliate determinations are inherently fact-specific and rebuttable, and the Bureau does not believe it would be appropriate to categorize all entities as affiliates based on a form listing.

The Bureau has considered the comments regarding whether financial institutions should be permitted to estimate or extrapolate gross annual revenue from partially reported revenue or other information, and is making a minor revision in final comment 107(a)(14)–1 to emphasize a manageable method for collecting full gross annual revenue when a financial institution does not already do so. Specifically, final comment 107(a)(14)–1 clarifies that a financial institution may rely on the applicant's statements or on information provided by the applicant in collecting and reporting gross annual revenue, even if the applicant's statement or information is based on estimation or extrapolation, and that an applicant may provide gross annual revenue calculated using any reasonable method. As such, when an applicant does not yet have fiscal year information completed (a hypothetical provided by a commenter), the applicant may choose to provide its gross annual revenue using any reasonable method, including estimating or extrapolating based on a prior fiscal year's tax return. The Bureau believes that this flexibility will help address concerns from commenters that tax returns may not be immediately available upon the close of a fiscal year. As noted by another commenter, an applicant may alternatively wish to provide revenue figures generated by a technology company's online platform ( e.g., through sales on the company's online marketplace). The Bureau notes that under final § 1002.107(b), however, a financial institution must report verified gross annual revenue information if available. Moreover, as provided by new comment 107(c)–5, a financial institution reports updated applicant-provided data if it obtains more current data during the application process; if this updated information is on data the financial institution has already verified, the financial institution reports the information it believes to be more accurate, in its discretion.

The Bureau also wishes to clarify some apparent confusion among some commenters who claimed that the proposal would have allowed financial institutions to extrapolate or estimate an applicant's revenue to determine whether or not a business is a small business. The proposal indicated that financial institutions could rely on extrapolated or estimated revenue information provided by applicants. The Bureau is making this position clear with final comment 107(a)(14)–1. The Bureau sought 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. On this issue, the Bureau does not believe that it would be appropriate to permit such estimation or extrapolation for the identification of small businesses about whom data collection and reporting is required, and thus financial institutions' own extrapolation or estimation should likewise not be used in reporting gross annual revenue in order to maintain consistency.

With respect to comments asking how to report gross annual revenue for a startup business, a new line of business, and/or a business with a change in structure or ownership, the Bureau is adding new comment 107(a)(14)–4, which notes that in a typical startup business situation, the applicant will have no gross annual revenue for its fiscal year preceding when the information is collected because either the startup existed but had no gross annual revenue or it simply did not exist in the preceding fiscal year. In these situations, the financial institution reports that the applicant's gross annual revenue in the prior fiscal year is “zero.” The Bureau agrees with the commenter that suggested, for a start-up business, the financial institution should use the actual gross annual revenue for its preceding fiscal year (including the reporting of $0 if a new business has had no revenue to date) and that pro forma projected revenue figures should not be reported since these figures do not reflect actual gross revenue.

In situations where an applicant is establishing a new line of business but already has revenue in other businesses, such as in the case of a sole proprietor with an established in-home child-care center who now seeks financing to start a new line of business offering house-cleaning services, the Bureau notes that final comment 107(a)(14)–3 clarifies 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. This comment may also apply to situations where there is a change in structure or ownership of the business. In response to a question from a commenter, the Bureau does not believe that treatment of affiliate gross annual revenue information should differ based on whether or not the new business line was in the same industry as the existing businesses. The Bureau notes that according to the definition of affiliate provided in final § 1002.102(a), which refers to the SBA's rules for determining affiliation (13 CFR 121.103), affiliation is not limited to businesses in the same industry. The Bureau also notes that final § 1002.106(a) defines a business as having the same meaning as the term “business concern or concern” in 13 CFR 121.105, which expressly provides that a firm will not be treated as a separate business concern if a substantial portion of its assets and/or liabilities are the same as those of a predecessor entity and that the annual receipts and employees of the predecessor will be taken into account in determining size. This successor-in-interest rule would apply to situations where a business reorganized, and a new entity emerges with essentially the same assets and liabilities as the old concern.

The Bureau is not exempting new businesses from having application data reported, as suggested by one commenter, because the Bureau believes that doing so would contravene section 1071's statutory purposes. The Bureau does not believe that the final rule will disproportionately impact credit opportunities (or compliance) for newly formed businesses that do not have the historical gross annual revenue. However, as suggested by a commenter, the Bureau will track questions related to collecting and reporting gross annual revenue information and may develop FAQs or other materials as necessary to help financial institutions help applicants determine what number to supply for gross annual revenue, particularly when a business is starting up or establishing a new business line.

The final rule does not permit financial institutions the option to use the gross annual revenue figures provided by an applicant for up to three years from the date of an application for which the information was gathered, as requested by one commenter. However, under final § 1002.107(d), discussed below, the Bureau is permitting financial institutions to reuse previously collected gross annual revenue information when the data were collected within the same calendar year as the current covered application. The statutory requirement is for the applicant's gross annual revenue in the last fiscal year preceding the date of the application; the Bureau does not believe that revenue information from years prior to the last fiscal year would satisfy this requirement.

107(a)(15) NAICS Code

Proposed Rule

The SBA customizes its size standards on an industry-by-industry basis using 1,012 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.

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 proposed in § 1002.107(a)(15) to require that financial institutions collect and report an applicant's 6-digit NAICS code. Proposed comment 107(a)(15)–1 would have provided general background on NAICS codes and would have stated 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 have clarified 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 also proposed 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 have clarified that, consistent with proposed § 1002.107(b), a financial institution may rely on applicable applicant information or statements when collecting and reporting the NAICS code and would have provided 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 have provided 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 believed 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 more granular 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). With a 2-digit NAICS code, all of these business types would be combined into one analysis, potentially masking different characteristics and different outcomes across these business types.

To address concerns related to the complexity of determining a correct NAICS code, the Bureau proposed 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)). The proposed NAICS-specific safe harbor would have been available to financial institutions in addition to the general bona fide error exemption under proposed § 1002.112(b).

The Bureau sought 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 sought comment on whether requiring a 3-digit NAICS code with no safe harbor would be a better alternative.

Comments Received

The Bureau received comments from a wide range of lenders, trade associations, community groups, and others regarding the reporting of a 6-digit NAICS code as proposed in § 1002.107(a)(15). Numerous community groups as well as a few lenders supported the Bureau's proposal and urged collection of a 6-digit NAICS code. Several commenters emphasized that 1071 data would adequately achieve a fair lending purpose only if they contain key variables that are used in underwriting and enable meaningful fair lending analysis. Commenters stated that NAICS codes provide critical context to understanding credit underwriting decisions and help ensure that fair lending analysis is focused on similarly situated businesses. A few commenters stated that these data must be reported so that lenders cannot hide behind data not collected as the justification for their lending disparities.

A bank and a bank trade association stated that NAICS code could potentially be helpful in demonstrating a non-discriminatory basis for credit decisions with respect to applicants in different industries. The trade association stated that, at most, the Bureau should only add limited data points pursuant to ECOA section 704B(e)(2)(H) that are considered by the financial institution in the credit underwriting process, citing NAICS code and time in business as examples.

Another trade association said that NAICS codes have the advantage of being independently defined and available for reference. The commenter stated that if a NAICS code is supplied by the applicant and published by the Bureau only in the aggregate, the NAICS code can contribute useful information without unduly burdening lenders.

Some commenters stated that a 2- or 3-digit NAICS code would be too high a level of aggregation to facilitate fair lending analysis. A CDFI lender stated that a 6-digit code will offer the most precise insight into the industries that lenders serve, whereas a 3-digit NAICS code will leave unnecessary ambiguity in the data. The commenter provided the example of a dry cleaner sharing the same 3-digit NAICS code as a mortuary and a parking lot.

Furthermore, a number of community groups and several lenders stated that 6-digit NAICS codes are useful for identifying certain industries' ability to access small business credit and to identify areas of unmet need. For example, one community group asserted that the ability to identify needs and opportunities for small businesses requires the ability to compare lending by sector to the total number of businesses in that sector based on other public data sources.

Moreover, some lenders and community groups said that it is already standard practice for many small business lenders to collect NAICS codes. For example, these commenters noted that lenders already collect NAICS codes for SBA loans, Equal Employment Opportunity Commission certifications, and CDFI loans.

In contrast, many industry commenters, along with several business advocacy groups and other commenters, generally opposed the data points proposed pursuant to ECOA section 704B(e)(2)(H), including NAICS code, as discussed in the section-by-section analysis of § 1002.107(a) above. In addition, the majority of industry commenters to address this issue specifically opposed collection of 6-digit NAICS codes. These commenters expressed concerns about the burden on both lenders and applicants and the complexity of determining the appropriate NAICS code. Concerns raised by commenters included, for example, that collecting NAICS codes would slow the loan application process; most lenders are unfamiliar with NAICS codes or do not currently collect them; lenders would have to change their operating procedures significantly which would create strain on staff and resources; and it would add more costs to the lending process which may be passed on to small business borrowers.

Many industry commenters also voiced concern regarding accuracy and data integrity, explaining that small businesses often do not know their NAICS code or may operate in multiple NAICS sectors. Other challenges cited by commenters included the business changing over time; codes having overlapping definitions; and classifications being prone to human error. For example, two trade associations noted that their members who made Paycheck Protection Program loans reported that many applicants were unfamiliar with NAICS codes. Additionally, some industry commenters expressed concern about verifying applicant-provided data and potential liability if the NAICS code is incorrect. One commenter noted that NAICS code classifications could be subject to change based on SBA rulemaking and thus financial institutions would need to monitor such developments. A credit union trade association stated that the identification of business and credit needs can be accomplished without explicit reference to NAICS codes, such as by leveraging already existing data sources and voluntary surveys of business owners. In addition, the trade association asserted that sector-specific analysis of business credit supply and demand is best left to the SBA, which already collects NAICS information through its lending programs.

Several commenters raised concerns that requiring NAICS codes would add confusion to the lending process. A trade association argued that requiring NAICS codes will create frustration for the small business borrower, including delayed application processing, and additional time and operational burden by banks to ensure the information is gathered and entered. They asserted that while NAICS codes are generally provided with some tax documents, lenders found borrower confusion when making Paycheck Protection Program loans, particularly when certain NAICS codes allowed for a more generous loan amount and certain small businesses were unable to benefit from higher loan amounts for certain sectors due to mismatched NAICS codes. Another commenter stated that applicants may struggle to determine which code to report, especially if the nature of the business changes over time or falls under multiple categories.

A number of industry commenters also expressed concern regarding privacy risks in collecting the 6-digit NAICS code. These commenters highlighted the risk of borrower re-identification, particularly in rural areas and smaller communities. Some commenters stated that NAICS code combined with census tract would make it easy to re-identify a small business. In addition, while a community group supported collection of a 6-digit code, it stated that the public database should provide only 4-digit NAICS codes to address privacy concerns.

In addition, a few commenters asserted that collecting NAICS codes would not advance the purposes of section 1071, arguing that collecting NAICS codes does not provide information that would inform fair lending analysis. For example, one bank stated that NAICS code would be of minimal value to fair lending analytics given the complexity of small business lending, such as the scope and size of the business. Moreover, several banks stated that they do not currently collect NAICS codes and that NAICS codes are not used in underwriting or financial analysis purposes.

A few industry commenters supported collection of a 2-digit NAICS code, stating that this would achieve the intended policy goal without creating unnecessary burdens and heightened costs, as well as protect the privacy of market participants. A trade association for online lenders supported collection of a 4-digit NAICS code, stating it would provide sufficient information while mitigating risk of re-identification and avoiding potential impacts and delays to the borrower during the application process. A joint letter from community and business advocacy groups urged the Bureau to permit the submission of a 3-digit code where the applicant does not provide a 6-digit code. Finally, one commenter suggested that the Bureau coordinate with the U.S. Census Bureau to create a suffix to a business's NAICS code that would identify its minority-owned or women-owned status. The commenter stated that this would create efficiencies across organizations and provide an easier and more neutral method of collecting demographic information on applications. The commenter further noted that this suffix could be easily masked when loans are sent to underwriters to ensure it does not impact their decisions.

Final Rule

For the reasons set forth herein, the Bureau is revising § 1002.107(a)(15) to require that financial institutions collect a 3-digit NAICS code for the applicant. The Bureau is also finalizing proposed comments 107(a)(15)–1, –2, and –5, with minor adjustments for consistency. Final comment 107(a)(15)–1 explains what a NAICS code is, and final comment 107(a)(15)–2 addresses what to report if a financial institution is unable to collect or otherwise determine the applicant's NAICS code. Proposed comments 107(a)(15)–3 and –4, which addressed a financial institution's reliance on information from the applicant and from other sources, have been removed as those issues are now addressed in final comment 107(b)–1. Final comment 107(a)(15)–3 (proposed as comment 107(a)(15)–5) cross-references the safe harbor in final § 1002.111(c)(3) for incorrect 3-digit NAICS code entries. The Bureau has considered commenters' concerns regarding the difficulties in obtaining an accurate NAICS code as well as the importance of NAICS codes for fair lending and community development analysis. The Bureau believes that collecting the 3-digit NAICS code will achieve the right balance between minimizing burden on financial institutions and small business applicants, while also providing valuable data to analyze fair lending patterns and identify industry subsectors with unmet credit needs.

The Bureau believes that NAICS code data will considerably aid in fulfilling both section 1071's fair lending purpose and its business and community development purpose, even if the NAICS code is not necessary for determining whether an applicant is a small business. While it will not provide the same level of detail as a 6-digit code, the 3-digit code will still help ensure that fair lending analysts are comparing applicants with similar profiles, thereby controlling for factors that might provide non-discriminatory explanations for disparities in underwriting and pricing decisions. Moreover, NAICS subsector codes are 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, 3-digit NAICS codes will help data users identify subsectors where small businesses face challenges accessing credit and understand how small businesses in different industries use credit. Furthermore, the Bureau believes that publication of NAICS codes (subject to potential modification and deletion decisions by the Bureau, as discussed in part VIII below) will help provide for some 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 may 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 agrees with commenters' concerns that the 2-digit NAICS code would not provide sufficiently detailed information to aid regulators and the public in monitoring particular industries' access to small business credit.

The Bureau recognizes that covered financial institutions not currently using NAICS codes will need to gain familiarity with the NAICS code system and refer to NAICS subsector classifications for all relevant applications before reporting 3-digit NAICS codes to the Bureau. To address concerns related to the complexity of determining a correct NAICS code, particularly for covered financial institutions that do not currently use NAICS codes, the Bureau is permitting a financial institution to rely on applicable applicant information or statements when compiling and reporting the NAICS code, as well as 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 or business credit reports (see final comment 107(b)–1). In other words, a financial institution may rely on oral or written statements from an applicant, other information provided by an applicant such as a tax return, or third-party sources such as business information products. The Bureau believes that being able to rely on NAICS codes obtained from the applicant or third-party sources significantly eases potential difficulties for financial institutions in collecting and reporting a 3-digit NAICS code and mitigates concerns about inadvertently reporting an inaccurate code.

In response to industry concerns regarding the accuracy of the NAICS code and the burden of verifying applicant-provided data, the Bureau emphasizes that financial institutions are permitted to rely on NAICS codes obtained from the applicant or third-party sources, without having to verify that information. Furthermore, the Bureau has expanded the NAICS code safe harbor in final § 1002.112(c)(3), which makes clear that the safe harbor extends to financial institutions that rely on an applicant's representations or on other information regarding the NAICS code. Final § 1002.112(c)(3) also provides a safe harbor for incorrect 3-digit NAICS code entries, where the financial institution identifies the NAICS code itself, provided that it maintains procedures reasonably adapted to correctly identify a 3-digit NAICS code. The Bureau has also removed the term “appropriate” from the regulatory text of § 1002.107(a)(15). The Bureau believes the term is unnecessary, particularly in light of the revisions to the NAICS code safe harbor in final § 1002.112(c)(3), and removing it may help avoid potential confusion regarding NAICS codes the financial institution obtains from the applicant or other sources.

Additionally, the Bureau understands that multiple NAICS codes may apply to a single business. While this may be more of a concern with 6-digit codes, if more than one 3-digit code applies to a single business, only one 3-digit NAICS code should be reported.

The Bureau acknowledges community groups' concern that collecting anything less than 6-digit NAICS codes will result in less precise data about industry classification. The Bureau nonetheless believes that its final rule requiring collection and reporting of 3-digit NAICS codes (along with the expanded safe harbor) strikes an appropriate balance in addressing the concerns raised by industry and the importance of NAICS code information in fair lending and community development analysis. The Bureau will monitor the utility of the NAICS code data point and, if warranted, may revisit the required number of digits in the future.

Although the Bureau will address re-identification concerns generally by modifying or deleting data upon publication, the Bureau notes that its shift to 3-digit NAICS codes will decrease the risk of re-identification of small business borrowers and related natural persons in rural areas and smaller communities. See part VIII below for further discussion about the privacy analysis and public disclosure of data.

107(a)(16) Number of Workers

Proposed Rule

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 the proposed rule, the Bureau stated that it believed that data providing the number of persons 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.

Proposed § 1002.107(a)(16) would have required financial institutions to report the number of non-owners working for the applicant.

Proposed comment 107(a)(16)–1 would have discussed the collection of the number of workers. The proposed comment would have stated 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. The proposed comment would have further stated that if the financial institution was asked, it 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, with minor simplifications. The Bureau sought comment on whether further modifications to the number of workers data point were needed to facilitate this operational simplification.

Proposed comment 107(a)(16)–1 would have also explained that workers for affiliates of the applicant would only be counted if the financial institution were also collecting the affiliates' gross annual revenue.

The proposed comment would have further explained that the financial institution could 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.

Proposed comment 107(a)(16)–1 would have also provided 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 provided the sample language in the proposed comment, which implements the simplified version of the SBA definition referenced above. The Bureau sought comment on this method of collection, and on the specific language proposed.

Proposed comment 107(a)(16)–2 would have first clarified 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 have then stated 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 sought 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 sought 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.

Comments Received

The Bureau received comments on its proposed number of workers data point from lenders, trade associations, and community groups. A number of commenters supported the Bureau's proposal. A few commenters urged the Bureau to adopt the number of workers data point, suggesting that it is important for business and community development purposes. A CDFI lender and community group commenter said that the number of workers data point will help provide a greater understanding of owner-operated and microbusiness needs and accessibility to affordable credit. Another community group commented that the data point provides insight into the number of jobs created, retained and/or supported by access to credit. This community group further noted that the data point would also assist in analysis of whether businesses of various sizes fare differently in the lending marketplace. Many community groups expressed support for collecting data on the number of workers because they believe it will help indicate whether smaller businesses of various sizes will require more support and technical assistance when it comes to credit access. A minority business advocacy group commented that the data will help determine various levels of economic development and impact across the country. A few commenters agreed with the Bureau's proposed method of collecting the number of non-owner workers and including part-time staff, seasonal staff, and contractors that work primarily for the business.

A trade association commented that the important considerations are that the Bureau provide language for lenders to provide to applicants to help applicants correctly answer the question and that the Bureau emphasize that financial institutions may rely on statements made by the applicant without incurring risk. Another industry commenter suggested that the final rule enable principal owners to count themselves as workers because this method is more common in industry and would avoid confusion. A bank recommended that the final rule expressly permit covered financial institutions to collect required data from applicants through a variety of means, including on the application form, supplemental documents or forms, or the sample data collection form. A CDFI lender suggested that the Bureau require financial institutions to report the breakdown of full-time and part-time workers.

The Bureau received many comments from industry opposing the proposal to collect data on the number of workers. Some commenters stated that data on the number of workers is not currently collected and that some customers do not readily have this information available, though several noted they had collected it for Paycheck Protection Program loans. A trade association stated that the data are unfamiliar to the applicant or difficult to obtain and will result in additional complexity, confusion, and significant operational and regulatory costs. Several commenters indicated that it is not a factor in the credit decision. A bank stated that it is not in the banker's role to determine this information and there is no reason to collect and monitor this data point if the small business is a creditworthy borrower.

A few industry commenters questioned the value of this data point, arguing that it would not aid in fulfilling the fair lending purpose of section 1071. Two asserted that without context (for example, separating full-time versus part-time and contract workers) there seems to be little value in collecting the information. One suggested that collection is further complicated when the gross annual revenue of an affiliate is considered, because then the number of workers for the affiliate must be included. Several industry commenters also stated that the proposed general exclusion of affiliate employees is problematic because some of these employees may perform substantial services for the applicant.

A bank commented that the CRA already considers the impact of adding jobs through small business and community development loans. Another bank commented that SBA uses either the gross annual revenue or number of workers, depending on the type of business, to qualify businesses as small and because the Bureau's proposal already contains a gross annual revenue size test, it would be unnecessary to collect the number of workers because it is irrelevant to the credit decision and determining the size of the business.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(a)(16) with an addition and a minor revision to the associated commentary. Pursuant to its authority under ECOA section 704B(e)(2)(H), the Bureau believes that data on the number of workers will aid in fulfilling the business and community development purpose of section 1071. Data on the number of persons working for a small business applicant will provide data users and relevant stakeholders with a better understanding of the job maintenance and creation that small business credit provides.

In response to comments regarding the complexity and difficulty in collecting information about the number of workers, the Bureau is adding a new comment to require that financial institutions report the number of workers using ranges rather than reporting the specific number of workers. Final comment 107(a)(16)–1 provides that a financial institution complies with § 1002.107(a)(16) by reporting the number of people who work for the applicant using the ranges prescribed in the Filing Instructions Guide. The Bureau believes that reporting the number of workers in ranges rather than a specific numerical value will eliminate some of the collection difficulties expressed by commenters, such as determining the exact number of employees when that number varies throughout the year.

The Bureau is finalizing comment 107(a)(16)–2 (renumbered from comment 107(a)(16)–1 in the proposed rule) with some revisions as well as additional guidance on how a financial institution may collect information about the number of workers in light of final comment 107(a)(16)–1. Specifically, a financial institution may collect the number of workers from an applicant using the ranges specified by the Bureau in the Filing Instructions Guide (as indicated in final comment 107(a)(16)–1) or as a numerical value. Final comment 107(a)(16)–2 retains from proposed comment 107(a)(16)–1 the discussion on collecting the number of workers, including the sample language to provide to applicants to ask about the number of workers and the statement that a financial institution may rely on the applicant's response, but the Bureau is making minor edits for clarity. The Bureau agrees with commenters that these provisions are helpful, and is including them to facilitate compliance.

The Bureau agrees with commenters' recommendations that financial institutions should be able to rely on statements made by the applicant and should be permitted to collect required data from applicants through a variety of means. First, the rule does not limit the means by which the number of workers data can be collected, and though it provides optional language to use, it does not require the use of that language. The Bureau believes that allowing financial institutions to rely on applicant-provided data will sufficiently safeguard accuracy such that the resulting data will aid in fulfilling the purposes of section 1071. The Bureau also believes that reporting the verified number of workers when the financial institution already possesses that information will not be operationally difficult, and will enhance the accuracy of the information collected. To facilitate compliance with the regulation, the Bureau provides guidance related to reliance on all applicant-provided data, including number of workers, in final comment 107(b)–1. Generally, that comment permits reliance on statements of the applicant or information provided by an applicant; however, if a financial institution verifies information, it reports the verified data. For more information on relying on statements made by or provided by an applicant, see the section-by-section analysis of § 1002.107(b).

The Bureau is finalizing comment 107(a)(16)–3 (renumbered from proposed comment 107(a)(16)–2) with a minor edit for clarity. Final comment 107(a)(16)–3 cites to § 1002.107(c), which provides that a financial institution shall maintain procedures reasonably designed to collect applicant-provided data, which includes the number of workers of the applicant. Comment 107(a)(16)–3 further explains that a financial institution reports that the number of workers is “not provided by applicant and otherwise undetermined” if, despite such procedures, the financial institution is unable to collect or determine the information. The Bureau believes that allowing this response will facilitate compliance when an applicant does not provide the requested data.

The final rule does not require financial institutions to report the distinction between various worker categories such as full time versus part time, as recommended by some commenters. The Bureau believes that requiring distinctions between various worker categories could introduce unnecessary complexity and compliance challenges. The final rule also does not include principal owners in the number of workers, as recommended by a commenter. The final rule requires the separate collection of the number of principal owners in final § 1002.107(a)(20), and the Bureau believes that this differentiation will improve the granularity and usefulness of the data collected.

The Bureau acknowledges comments noting that some financial institutions do not collect or maintain data on number of workers nor is the information used in their credit decisions. However, the Bureau believes that number of workers is critical to further the business and community development purpose of section 1071 and the Bureau does not believe it will be particularly difficult for financial institutions to obtain this information if they do not do so already. The Bureau has also provided sample language in final comment 107(a)(16)–2 that a financial institution may use to ask an applicant about the number of workers.

With respect to questions from commenters about how the number of workers data point meets section 1071's purposes, as discussed above the Bureau believes the data will provide insight into small business credit that contributes to job creation and maintenance, as well as other trends in the small business market's ability to grow and maintain workers, and the full set of data required to be collected and reported under this final rule should provide sufficient context for meaningful understanding of this data point. Regarding the comment that the CRA already considers the impact of adding jobs through small business and community development loans, the Bureau notes that data collected under section 1071 vary from data collected under CRA and the institutions subject to section 1071 are not necessarily subject to CRA. Regarding the concerns raised by commenters that the number of workers for an applicant's affiliates must be counted if the affiliates' gross annual revenues are considered, the Bureau notes that the applicant is already providing information on affiliate(s) in this situation, and the financial institution can simply ask a question regarding number of workers, perhaps using the language provided in final comment 107(a)(16)–2, and tell the applicant to include affiliate information.

107(a)(17) Time in Business

Proposed Rule

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 the proposed rule, the Bureau stated that it believed 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.

The Bureau proposed § 1002.107(a)(17) to 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 have required the data be reported in whole years, rather than ranges of time, because a financial institution would have a definite number of years if it collects this information presently, and the Bureau believed that time in business reported in whole years would make the data more granular and useful.

Proposed comment 107(a)(17)–1 would have provided guidance on how to report one of the two methods (relied on or collected) for reporting the time-in-business data point. The proposed comment would have explained 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. Proposed comment 107(a)(17)–1 would have explained 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 have further explained 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.

Proposed comment 107(a)(17)–1 would have also explained 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 have applied whether the financial institution relies on the time in business in making its credit decision or not, although the Bureau believed that verification would be very uncommon when the financial institution is not relying on the information.

Proposed comment 107(a)(17)–2 would have provided instructions on how to report the time in business relied on in making the credit decision. The proposed comment would have stated 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 have further explained, 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 have then concluded 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.

Proposed comment 107(a)(17)–3 would have stated 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 proposed comment would have provided 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.

Proposed comment 107(a)(17)–4 would have clarified 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 includes the applicant's time in business. The proposed comment would have explained 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 have further explained 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. Proposed comment 107(a)(17)–4 would have then concluded 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 have explained 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 sought comment on its proposed approach to this data point. The Bureau also sought 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 sought 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.

Comments Received

The Bureau received comments on its proposed time in business data point from a number of lenders, trade associations, and community groups. A number of commenters supported the Bureau's proposal to collect time in business data with some pointing out the importance of time in business for the fair lending and community development purposes of section 1071. A trade association noted that time in business data are potentially useful for lenders, policymakers, regulators, and communities and that this is a common credit consideration for the type of small business lending undertaken by certain financial institutions. This trade association asserted that the data can help explain differences in underwriting risk among small business applicants and avoid misinterpretation of the dataset by distinguishing potentially riskier new businesses from established businesses. A community group stated that this data point is needed to assess if access to credit is reasonably available and whether there are geographical barriers that do not seem present in other areas based on analysis of the data. This commenter further stated that such analysis can help stakeholders identify and ameliorate any access to credit barriers for younger firms.

A bank and a trade association commented that this data point could be helpful in demonstrating a non-discriminatory basis for different credit decisions and may provide helpful context for evaluating the basis for credit decisions and conducting an accurate, fact-based fair lending analysis. A community group stated that lenders already collect or consider the number of years a small business has been in operation as it is an element of loan risk and underwriting. This commenter further stated that time-in-business data would allow the assessment of whether businesses of similar duration are likely to receive credit at comparable terms, such as by comparing Black-owned, Latino-owned, and Asian-owned start-ups with white-owned start-ups. A number of commenters noted in discussing data points, including time in business, that fair lending analysis requires a robust set of key variables that are used in underwriting. Relatedly, other commenters stated that data collected under the Bureau's rule must be sufficient to allow data users to understand the characteristics of applicants that are denied credit so as to identify areas of unmet need and also to be able to compare declined applicants with those who are approved for credit to look for evidence of discrimination.

Commenters specifically pointed out the importance of collecting information regarding whether a business is a start-up. A community group noted start-ups and younger businesses generally have more difficulties qualifying for credit, and other commenters pointed out that it is well known that start-ups often struggle to access financing.

In contrast, the Bureau received many comments from lenders and trade associations generally opposing the Bureau's proposal to collect time in business. One trade association questioned how asking how long a company has been in operation furthers fair lending purposes. A few banks stated that the information is not considered for underwriting purposes or relevant to the creditworthiness of the applicant. An agricultural lender asserted that time in business data can be unknown, misleading, or not relevant. A few industry commenters asserted that time in business data are not currently collected or maintained by lenders. Some commenters said collecting time in business data would impose compliance burden and one also said that it would add friction to the application process. A bank stated that customers do not have this type of information readily available when applying for a commercial loan. Another bank noted that the data point adds a layer of complexity, will not provide useful information that advances section 1071, and goes beyond what other laws, such as HMDA, require financial institutions to collect. A trade association commented that time in business is unfamiliar to the applicant or difficult to obtain and will result in additional complexity, confusion, and significant operational and regulatory costs. Another trade association said this data point involves complexities because many small businesses cannot provide an exact amount of time in business due to name changes, mergers and acquisitions, and other routine events that complicate this calculation. A bank stated that its borrowers rarely keep good enough records to properly state the date they began doing business. An agricultural lender stated that time in business can be difficult to determine for a farming operation that may have begun as a lifestyle venture or arose from multiple generations of farming.

Some commenters expressed concerns with the data to be collected as well as the method of reporting. A bank stated that it makes loans for startup companies and relies on the applicant's experience in the given industry rather than the length of time they have operated their current business; however, underwriting for an established business uses the length of time that specific business has been in operation. Although the Bureau's proposal allows for the consideration of business experience or business longevity, this commenter and several others asserted that the resulting data gathered will not be comparable and analysis of that data will be meaningless. Another bank stated that in most cases, the credit decision is a combination of the number of years the applicant has been in business and the number of years the principals have been in the industry, but if one institution reports the number of years the applicant has been in business and another reports the number of years of experience of the principals, they would not appear to be as similarly situated as they are; therefore, it will be impossible to make comparisons or draw accurate conclusions with respect to the information submitted. Another bank pointed out this same issue and stated that the mixture of responses would lead to unreliable information, unjustifiable conclusions, and unjustified burden on applicants and financial institutions. Other banks and a trade association also indicated that the credit decision can be based on a combination of the number of years the applicant has been in business and the number of years the principals have been in the industry. Two of these commenters also said that the Bureau did not provide guidance on how to report the data in these circumstances.

A bank trade association commented that many small business borrowers create new entities for various reasons and expressed concern that the data collected could suggest lenders are giving more favorable treatment to new small businesses as opposed to existing ones. Another trade association stated that collecting time in business using management or owner experience rather than the age of the business itself undercuts the Bureau's rationale that time in business could explain the difference in underwriting risk among small business applicants and avoid misinterpretation of data. This commenter recommended that time in business be collected at the financial institution's option. A bank was concerned that time in business data may make it appear to discriminate against start-up businesses, explaining that its practice has been to avoid providing financing for start-up businesses unless it can secure government guaranties because in distressed areas where the bank generally lends, start-up businesses have historically been unable to sustain a repayment history for the loan term due to business closure and liquidation. Therefore, the bank explained, if comparing this information for fair lending, it will appear that they are discriminating against start-up businesses when there are studies showing that minority-owned businesses are under-financed as start-ups.

Several commenters requested the Bureau provide clarification on certain aspects of reporting the data point or made recommendations for reporting the data. A bank suggested that the Bureau collect the time the business has been active regardless of ownership experience or time the current owners have owned this business. A community group recommended that financial institutions be required to report the time in business used when underwriting the loan because time in business could refer to either the time period since the business was formally incorporated or the time period of operation. A bank requested clarification on temporary lapses in business and how to report seasonal businesses. Several agricultural lenders and a trade association suggested that if this data point is not dropped then the Bureau should tie it to the established Farm Credit data point, “Year began Farming,” because Farm Credit associations already collect “Year began farming.” These commenters reasoned that there would be needless confusion in the context of agricultural credit if there were separate and competing definitions of “Time in business” and “Year began farming.” A bank recommended that the easiest way to report time in business information is with a number in the column; however, it suggested that for newer businesses, particularly for those with less than one year in business, the number should be reported in ranges, e.g., 0–6 months or 7–12 months. A community group said that credit card lenders should not be able to routinely report “not applicable” for this data point because the information should not be too hard to ask for on an application form. A bank and a trade association requested that the Bureau allow all financial institutions to report the applicant's time in business, whether used in credit underwriting or collected from the applicant, and to rely on the information provided by the applicant. These commenters also requested that the Bureau include in the final rule a safe harbor from liability for reporting the applicant-provided time in business. Another trade association also recommended that the Bureau clarify that financial institutions may rely on statements made by the applicant without incurring risk.

A bank commented that putting an upper limit on years to report is not a good idea and said that time in business should always be reported as a specific number of years. The bank reasoned that there are businesses that struggle at the 5 year mark, the 10 year mark, or the 50 year mark. According to this bank, one should not assume that applicants are “fine” because those years are above an arbitrary number the Bureau has chosen.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(a)(17) with revisions to the regulatory text and commentary. As explained below, financial institutions will be required to report the time the applicant has been in business, but the Bureau has revised the requirements to provide financial institutions more flexibility in collecting the information. Pursuant to its authority under ECOA section 704B(e)(2)(H), the Bureau determines that collecting data on time in business will further the purposes of section 1071, as further explained below.

The Bureau believes that time in business will advance both statutory purposes of section 1071. Research illustrates 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. 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.

Time in business data will benefit data users, including financial institutions, policymakers, economic analysts, and communities by allowing them to better identify the proportion of small businesses seeking credit that are start-ups or relatively new businesses, the type(s) of credit offered to these groups, the geographic setting of these 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. This data point will also facilitate fair lending analyses by providing a useful control to identify similarly situated applicants and eliminate some false positives, while also allowing monitoring of potential disparate treatment of relatively new minority- and women-owned small businesses.

The Bureau understands from commenters that there are complexities associated with collecting time in business information from an applicant for various reasons, including applicant difficulty providing an exact time because of prior name changes, events that affected the applicant's structure, multi-generational ownership, and others discussed by commenters above. In light of the feedback received, the Bureau has revised the requirements for reporting time in business information, based on the financial institution's procedures. The Bureau is also not finalizing this data point to include data as relied on by the financial institution to make a decision. Rather, the final rule requires financial institutions to report time in business as collected or otherwise obtained. Although this requirement is similar to reporting the time in business relied on, the new language makes clear that the financial institution reports the time in business collected or obtained regardless of whether it relied on that information in underwriting the application. Commenters indicated that they may base their credit decision on a combination of factors, such as the time the applicant has been in existence and the time the owners have been in the industry, while other commenters indicated that they do not collect or use time in business for underwriting purposes. The Bureau believes that standardizing the time in business data point to be based on what the financial institution collects or obtains streamlines the requirement and provides flexibility for the financial institution to report time in business information based on its credit policies or programs rather than having to select a time in business method specifically for reporting pursuant to this rule. Accordingly, the Bureau is not finalizing “as relied on or collected by the financial institution” in the regulatory text. Final regulatory text for § 1002.107(a)(17) requires reporting of the time the applicant has been in business; however, the Bureau is providing further details guidance in commentary regarding time in business collection and reporting, as explained below. As some commenters suggested, allowing different methods for measuring time in business will have an effect on the comparability of the data, but information about the time in business actually collected by the financial institution for its own purposes will be useful for fair lending analysis and will impose less operational difficulty than requiring reporting based on a single definition. For example, this method will allow a financial institution to use the “year began farming” date, as suggested by some commenters, to report time in business without further inquiry.

Final comment 107(a)(17)–1.i provides that a financial institution reports time in business in whole years if, as part of its procedures, it collects or obtains the number of years an applicant has been in business. Final comment 107(a)(17)–1.i also provides guidance to make clear that if the financial institution reports the number of whole years, the financial institution rounds down to the nearest whole year. Final comment 107(a)(17)–1.ii provides that if a financial institution does not collect or obtain the number of years an applicant has been in business, but as part of its procedures it determines whether or not the applicant has been in business less than two years, then the financial institution reports the applicant's time in business as either less than two years or two or more years. Final comment 107(a)(17)–1.iii provides that if a financial institution does not collect or obtain time in business, either as number of years or a determination as to whether the applicant has been in business less than two years, then the financial institution complies with the rule by asking the applicant whether it has been in business less than two years or two or more years. The Bureau is not finalizing the provision in proposed comment 107(a)(17)–1.ii to require financial institutions to indicate whether an applicant has not begun operating yet or has been in operation less than a year. In addition, the Bureau is not requiring that newer business applicants' time in business be reported in ranges, as one commenter suggested. The Bureau believes that time in business information reported in whole years or an indication of over or under two years can provide data users with robust information regarding start-ups and newer businesses as well as the maturity of other businesses, thus furthering the purposes of section 1071 while also simplifying collection and reporting. Issues such as whether to report the time in business based on the time of incorporation or time of business opening, lapses in business operation such as for a seasonal business, and new business entities that do not actually constitute a new enterprise should all be considered within the financial institution's discretion in collecting time in business. The Bureau does not believe that these scenarios will have a significant effect on the quality of the data reported, but crafting a rule that takes them into account could considerably increase the operational difficulty of compliance.

Final comment 107(a)(17)–2 provides that a financial institution that collects time in business as part of its procedures is not required to collect or obtain time in business information pursuant to a specific definition for the purposes of this rule. The comment provides examples of how a financial institution may define time in business, including by asking the applicant when the business started or based on the owner's experience in the industry. As discussed above, the Bureau understands from commenters that a financial institution may collect and/or consider for underwriting both the number of years the applicant has been in business and the number of years of experience an owner has in the industry. In response to a comment requesting clarification and to mitigate other commenter concerns, final comment 107(a)(17)–2 provides that if a financial institution collects the number of years the applicant has existed as well as another measure of time in business, such as the number of years of experience an owner has in the industry, the financial institution reports the number of years the applicant has existed as the time in business. The Bureau believes that this method will result in more uniform and comparable data on time in business and should not cause operational difficulty because the financial institution will be reporting information that it already collects.

Comment 107(a)(17)–3 (renumbered from proposed comment 107(a)(17)–6) is finalized with minor clarifications. Final comment 107(a)(17)–3 provides that a financial institution is required to maintain procedures reasonably designed to collect applicant-provided data, which includes time in business; however, if the financial institution is nonetheless unable to collect this information, then the financial institution reports “not provided by applicant and otherwise undetermined” for the time in business data point. The Bureau believes that providing this reporting option will facilitate compliance.

The Bureau acknowledges commenters' arguments that time in business is not collected by some financial institutions now nor used by such institutions for underwriting purposes. However, other industry commenters indicated that they do collect and use time in business for underwriting (for example, commenters stated the credit decision is based on a combination of the number of years the applicant has been in business and the number of years the principals or owners have in the industry).

Commenters also expressed concern with the burden associated with collecting time in business information. The Bureau does not believe it would be too difficult for financial institutions to collect this information if they do not already do so, and the ability to merely ask whether a business has existed for less than two years or two years or more should reduce any complexity for applicants in providing the information. The Bureau also believes that collection of time in business will further the dual purposes of section 1071, as discussed above. The final rule does not permit time in business information be reported at the financial institution's option, as the Bureau believes that if it made this data point optional, very little data would be reported.

With respect to the concern raised by a commenter that reporting time in business information may cause a financial institution to appear to discriminate against start-up businesses because of its policy to avoid providing financing to start-ups, the Bureau believes that time in business information will help mitigate concerns of data misrepresentation and help explain the credit decision made by a financial institution. For example, data indicating that an applicant is relatively new with little experience or financial history could explain why the financial institution denied the application or approved it for less than what was applied for.

With respect to the recommendation that the Bureau allow all financial institutions to report the applicant's time in business whether used in credit underwriting or collected from the applicant, the final rule provides this flexibility for financial institutions. The final rule also allows the financial institution to collect applicant-provided data, including time in business information, from appropriate third-party sources. See final § 1002.107(b).

The Bureau is not adopting a safe harbor from liability for reporting the applicant-provided time in business for the reasons provided in the section-by-section analysis of § 1002.112(c). Guidance related to relying on information provided by an applicant and appropriate third-party sources, including time in business information, is provided in final comment 107(b)–1. (Similar content was included in proposed comment 107(a)(17)–1.) That comment explains that a financial institution needs report verified information only if it verifies information from the applicant for its own business purposes. Because the rule makes clear that a financial institution may rely on statements made by or information from the applicant regarding time in business and need not verify its accuracy, the Bureau does not believe that a safe harbor is necessary. For more information on relying on information provided by an applicant, see the section-by-section analysis of § 1002.107(b).

107(a)(18) Minority-Owned, Women-Owned, and LGBTQI+-Owned Business Statuses Background

ECOA section 704B(b) requires financial institutions to inquire whether applicants for credit are minority-owned and/or 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). 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 finalizing § 1002.107(a)(18) to address how a financial institution would collect and report an applicant's minority-owned and women-owned business statuses, along with LGBTQI+-owned business status which the Bureau believes would aid in fulfilling the purposes of section 1071.

The Bureau proposed appendix F to provide instructions to aid financial institutions when collecting minority-owned business status pursuant to proposed § 1002.107(a)(18) and women-owned business status pursuant to proposed § 1002.107(a)(19). However, there was some duplication between what was contained in proposed appendix F and in proposed § 1002.107(a)(18) and (19) and associated commentary.

As discussed further herein, final § 1002.107(a)(18) differs from proposed § 1002.107(a)(18) in a number of ways, largely to streamline the rule and facilitate compliance. First, the final rule combines proposed § 1002.107(a)(18) and (19) into final § 1002.107(a)(18). Next, final § 1002.107(a)(18) also requires collection of LGBTQI+-owned business status. Finally, the commentary to final § 1002.107(a)(18) incorporates the information contained in proposed appendix F.

Proposed Rule—Proposed § 1002.107(a)(18) and (19)

In order to implement the section 1071 requirement that financial institutions inquire whether applicants for credit are minority-owned and/or women-owned businesses, the Bureau proposed § 1002.107(a)(18) to address minority-owned business status, and § 1002.107(a)(19) to address women-owned business status. The text of these proposed provisions was otherwise identical in their language. Proposed § 1002.107(a)(18) and (19) would have required financial institutions to collect and report whether an applicant is a minority-owned or women-owned business, respectively. Proposed § 1002.107(a)(18) and (19) would also have required financial institutions to collect and report whether minority-owned business status or women-owned business status, respectively, was being reported based on previously collected data pursuant to proposed § 1002.107(c)(2). When the financial institution requests minority-owned and women-owned business statuses from an applicant, the financial institution would have been required to inform the applicant that the financial institution cannot discriminate on the basis of the applicant's minority-owned or women-owned business status, or on whether the applicant provides this information. Finally, proposed § 1002.107(a)(18) and (19) would have referred to proposed appendix F for additional details regarding how financial institutions are required to collect and report minority-owned or women-owned business statuses, respectively. Proposed appendix F would have included 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 inform the applicant of a prohibition on financial institutions requiring applicants to provide this information.

Proposed comments 107(a)(18)–1 and 107(a)(19)–1 would have clarified that a financial institution would be required to ask an applicant if it is a minority-owned business or women-owned business, respectively, for each covered application unless the financial institution is permitted to report minority-owned business status or women-owned business status, respectively, based on previously collected data. Additionally, the financial institution would have been 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 have reported 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.

Proposed comments 107(a)(18)–2 and 107(a)(19)–2 would have explained 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 women-owned business status, respectively, or on whether the applicant provides the information. These proposed comments would also have clarified that a financial institution may combine this non-discrimination notice regarding minority-owned business status or women-owned business status, respectively, with the similar non-discrimination notices that a financial institution is required to provide when requesting women-owned business status or minority-owned business status, respectively, and a principal owner's ethnicity, race, and sex if a financial institution requests such information in the same data collection form or at the same time.

Proposed comments 107(a)(18)–3 and 107(a)(19)–3 would have explained how, pursuant to proposed § 1002.111(b), financial institutions must record an applicant's response regarding minority-owned business status and women-owned business status pursuant to proposed § 1002.107(a)(18) or (19), respectively, separate from the application and accompanying information. These proposed comments would have also provided examples of how responses could be recorded separately from the application and accompanying information.

Proposed comments 107(a)(18)–4 and 107(a)(19)–4 would have stated 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 or women-owned business status, respectively. However, if a financial institution did not receive a response to its inquiry, the financial institution would have reported that the applicant's minority-owned business status or women-owned business status, respectively, is “not provided by applicant.”

Proposed comments 107(a)(18)–5 and 107(a)(19)–5 would have stated that notwithstanding proposed § 1002.107(b) (regarding verification of applicant-provided information), a financial institution would have reported 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) or (19), respectively, even if the financial institution verifies or otherwise obtains an applicant's minority-owned business status or women-owned business status for other purposes. Moreover, a financial institution would not have been required or permitted to verify the applicant's responses to the financial institution's inquiries pursuant to proposed § 1002.107(a)(18) or (19) regarding minority-owned business status or women-owned business status, respectively.

Proposed comments 107(a)(18)–6 and 107(a)(19)–6 would have clarified that a financial institution does not report minority-owned business status or women-owned business status, respectively, 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)(18) or (19), respectively, or, if the financial institution was 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) or (19), respectively.

Proposed comments 107(a)(18)–7 and 107(a)(19)–7 would have clarified that a financial institution may report minority-owned business status or women-owned business status, respectively, based on previously collected data if the financial institution is permitted to do so pursuant to proposed § 1002.107(c)(2) and its commentary.

The Bureau sought comment on its proposed approach to these data points, including the proposed methods of collecting and reporting the data. The Bureau also requested comment on whether additional clarification regarding any aspect of these data points is needed. In particular, the Bureau sought 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.

Proposed Rule—Proposed Appendix F

Proposed appendix F would have provided instructions to aid financial institutions when collecting minority-owned business status pursuant to proposed § 1002.107(a)(18) and women-owned business status pursuant to proposed § 1002.107(a)(19).

The Bureau proposed 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 statuses pursuant to 704B(b)(1). Further, the Bureau proposed 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 sought comment on the proposed instructions, and generally sought comment on whether additional clarification regarding any aspect of the proposed instructions was needed. The Bureau further requested comment on whether additional or different instructions were 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 sought comment regarding the challenges faced by both applicants and financial institutions by the data collection instructions prescribed in appendix F and specifically requested comment on ways to improve the data collection of minority-owned business status and women-owned business status.

Comments Received—Women-Owned and Minority-Owned Business Statuses

The Bureau received comments on proposed § 1002.107(a)(18) and (19) and appendix F from some industry and community group commenters. Commenters uniformly supported the Bureau's proposal that the financial institution would rely solely on the applicant to determine minority-owned and women-owned business statuses, and that institutions should not be required or permitted to verify an applicant's response. One commenter requested that a financial institution not be required to conduct any follow-up if an applicant fails to provide the information. Another noted that owners and ownership status may change from day to day. One said that the back-office functions of financial institutions will need to ensure the data are being reported correctly and identify any issues in the data, which will require an increase in staff.

A commenter asserted that applicants should be permitted to self-report whether they have been certified by a third-party organization as a minority- and/or women-owned business and the name of the certifying organization, which it said would promote the objectives of section 1071 by encouraging responses of relevant and verifiable information. Another commenter suggested that the Bureau coordinate with the U.S. Census to create a minority and women-owned business suffix to a business's NAICS code which identifies their minority or women-owned business status.

Regarding appendix F, some commenters supported the proposed approach to collecting information. Several commenters requested that the Bureau eliminate duplication and include all mandatory statements in the rule text, rather than in the appendices.

Comments Received—LGBTQI+-Owned Business Status

As discussed in the section-by-section analysis of § 1002.102(k) and ( l) above, regarding the definitions for LGBTQI+ individual and LGBTQI+-owned business, the Bureau sought comment on whether it should adopt a data point to collect an applicant's lesbian, gay, bisexual, transgender, or queer (LGBTQ+)-owned business status, similar to the way it proposed to collect minority-owned business status and women-owned business status.

The Bureau received comments from several banks, individual commenters, and community groups on this issue. Some commenters did not support including such a data point in the final rule, generally stating that asking for such information would be offensive, would be considered an invasion of privacy, or would damage bank-customer relationships. One commenter said that applicants are unlikely to provide this information and that an applicant's LGBTQ+-owned business status is not considered in the lending process and thus should not be part of this data collection.

A few commenters also stated that asking for such information could potentially further segregate and stigmatize LGBTQ individuals and their businesses, when they already face bias and discrimination. These commenters also raised concerns about the privacy and security of the collected information, noting that storing it with financial institutions and in a nationwide database exposes the information to not only authorized persons but also potentially to hackers. These commenters argued that although there is some protection in the Federal employment law context due to the U.S. Supreme Court's opinion in Bostock v. Clayton County, there are States where discrimination against LGBTQ individuals is legal and thus inferences about one's sexuality could have serious negative impacts. They also expressed concern that this information could be used for unintended purposes. One commenter also expressed a concern that previously collected information about an applicant's LGBTQ+-owned business status could be used inappropriately.

Other commenters supported inclusion of LGBTQ+-owned business status in the final rule, generally asserting the collection of information about a business' LGBTQ+-owned status is appropriate and necessary under the law. One commenter stated that businesses owned by LGBTQ+ individuals face discrimination and bias and urged the Bureau to use its ECOA section 704B(e)(2)(H) authority to require the collection of such information. Another commenter argued that data about lending availability to LGBTQ-owned businesses will enhance the Bureau's ability to enforce fair lending laws to protect them from discrimination in credit, and identify their credit needs. Another commenter stated that collecting applicants' LGBTQ+-owned business status is necessary to ensure that LGBTQ+ small business owners are being treated fairly by lenders and fulfill the purposes of section 1071. One commenter suggested that the Bureau include an inquiry to identify businesses who have experienced impermissible sex discrimination under ECOA without requiring information on the owners' specifically held identities if they do not wish to disclose them. This commenter suggested this would be consistent with the Bureau's proposal regarding the collection of ethnicity and race.

A commenter also stated that there is public and congressional support for the collection of LGBTQ+-owned business status information, noting that H.R. 1443, the LGBTQ Business Equal Credit Enforcement and Investment Act, would have amended ECOA to include a definition for “LGBTQ-owned business” and require the collection of LGBTQ-owned business status.

Commenters suggested that the Bureau adopt the same approach it proposed using for collecting minority-owned and women-owned business statuses, by providing applicants with a definition for LGBTQ-owned business status and allowing respondents to indicate whether they are or are not such a business. Another commenter recommended that financial institutions not be allowed to collect or report such information on the basis of visual observation, surname analysis, or any method other than applicant-provided responses. This commenter also stated that financial institutions should not be permitted or required to verify an applicant's LGBTQ+-owned business status.

Final Rule—Business Status in General

For the reasons set forth herein, the Bureau is adopting § 1002.107(a)(18) with a number of changes to require collection of minority-owned business status, to incorporate collection women-owned business status (from proposed § 1002.107(a)(19)) and to add LGBTQI+-owned business status, along with a number of conforming changes to the commentary. The Bureau has also incorporated information from proposed appendix F into the commentary to final § 1002.107(a)(18), added additional commentary for parity with final § 1002.107(a)(19) regarding collection of principal owners' ethnicity, race, and sex, and updated a number of cross-references.

Final § 1002.107(a)(18) requires the collection of information regarding whether the applicant is a minority-owned, women-owned, and/or LGBTQI+-owned business. When requesting minority-owned, women-owned, and LGBTQI+-owned business statuses from an applicant, § 1002.107(a)(18) requires that a financial institution inform the applicant that the financial institution cannot discriminate on the basis of minority-owned, women-owned, or LGBTQI+-owned business statuses, or on whether the applicant provides this information.

Final comment 107(a)(18)–1 clarifies that a financial institution must ask an applicant whether it is a minority-owned, women-owned, and/or LGBTQI+-owned business. A financial institution must permit an applicant to refuse ( i.e., decline) to answer the inquiries and must inform the applicant that it is not required to provide the information. The financial institution must report the applicant's substantive responses, that the applicant declined to answer, or its failure to respond to an inquiry, as applicable.

Final comment 107(a)(18)–2 clarifies that a financial institution must provide the applicants with definitions of the terms minority-owned business, women-owned business, and LGBTQI+-owned business when inquiring about these business statuses. A financial institution satisfies this requirement if it provides the definitions set forth in the sample data collection form in appendix E.

Final comment 107(a)(18)–3 clarifies that a financial institution may combine on the same paper or electronic data form the business status questions along with the data requested in § 1002.107(a)(19) (principal owners' ethnicity, race, and sex) and § 1002.107(a)(20) (number of principal owners).

Final comment 107(a)(18)–4 (renumbered from comment 107(a)(18)–2 in the proposal and incorporating additional information from proposed appendix F) explains that a financial institution must inform the applicant that the financial institution cannot discriminate on the basis of an applicant's business statuses or on whether the applicant provides the information. Under the final rule, a financial institution must also inform the applicant that Federal law requires it to ask for an applicant's minority-owned, women-owned, and LGBTQI+-owned business statuses to help ensure that all small business applicants for credit are treated fairly and that communities' small business credit needs are being fulfilled (this disclosure would have been optional under the NPRM). The Bureau believes that this notice should be compulsory, rather than voluntary, to ensure that applicants receive information about the data collection rule and its purposes. See the section-by-section analysis of § 1002.107(a)(19) for further explanation and discussion of comments received on this issue.

Final comment 107(a)(18)–5 explains that a financial institution must maintain the record of an applicant's responses to the financial institution's inquiry separate from the application and accompanying information.

Final comment 107(a)(18)–6 explains that 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 business statuses were “not provided by applicant.”

Final comment 107(a)(18)–7 explains that a financial institution reports that the applicant responded that it did not wish to provide the information about an applicant's business statuses if the applicant declines or refuses to provide the information by selecting such a response option on a paper or electronic form. The financial institution reports an applicant's refusal to provide such information in this way, if the applicant orally declines to provide such information for a covered application taken by telephone or another medium that does not involve providing any paper or electronic documents.

Final comment 107(a)(18)–8 explains that if an applicant both provides a substantive response to the financial institution's inquiry regarding business status and also checks the “I do not wish to provide this information” box or similar for that question, the financial institution reports the applicable business status(es) provided by the applicant (rather than reporting that the applicant declined to provide the information).

Final comment 107(a)(18)–9 explains that, notwithstanding § 1002.107(b) (regarding verification of applicant-provided data), a financial institution must report the applicant's substantive response(s), that the applicant declined to answer the inquiry, or the applicant's failure to respond to the inquiry, even if the financial institution verifies or otherwise obtains an applicant's business statuses for other purposes, and provides an example of such a situation.

With regard to commenters who asserted that applicants should be able to rely upon minority-owned or women-owned business status certifications received from a third-party organization, the Bureau believes that the definitions of minority-owned or women-owned business statuses from third-party organizations may not align with the definitions found in section 1071 and codified in this rule, and thus reliance on them would not be appropriate. As addressed above, final comment 107(a)(18)–2 clarifies that a financial institution must provide applicants with definitions of the terms minority-owned business, women-owned business, and LGBTQI+-owned business, as provided in this rule, when asking questions about these business statuses.

Final Rule—LGBTQI+-Owned Business Status

For the reasons set forth herein, the Bureau is exercising its authority under ECOA section 704B(e)(2)(H) to require financial institutions to request information about whether an applicant is a LGBTQI+-owned business. The Bureau believes that the collection of this information will further section 1071's statutory purposes. Specifically, the Bureau believes that the collection of this information will help address an information gap about small business lending and facilitate fair lending enforcement and the identification of business and community development needs and opportunities for small businesses.

Based on the limited information available, the Bureau believes that LGBTQI+-owned businesses may experience particular challenges accessing small business credit. For example, one report found that, while LGBTQ businesses were equally likely to apply for financing, they were less likely to receive it, with about 46 percent of LGBTQ-owned businesses reporting that they had received none of the financing that they had applied for in the past year, as compared to 35 percent of non-LGBTQ businesses that applied for funding. The report noted that LGBTQ-owned businesses were more likely than non-LGBTQ businesses to explain their denial was due to lenders not approving financing for “businesses like theirs” (33 percent versus 24 percent), among other reasons. The same report also found that LGBTQ-owned businesses that applied for Paycheck Protection Program funding in 2021 were less successful in receiving funding applied for than non-LGBTQ businesses.

ECOA section 704B(e)(2)(H) provides the Bureau with broad discretion to collect “any” additional data it determines would aid in fulfilling the purposes of section 1071. As discussed, the Bureau has determined that the collection of business applicants' LGBTQI+-owned business status information, in addition to requiring information on principal owners' specifically held sex/gender identity, as discussed in the section-by-section analysis of § 1002.107(a)(19) below, will facilitate the purposes of section 1071 and is thus exercising its authority under section 1071 to require its collection.

Similar to the proposed (and final) approaches for collecting women-owned and minority-owned business statuses, financial institutions are required to provide the definition of “LGBTQI+-owned business” under § 1002.102( l) when requesting information about an applicant's LGBTQI+-owned business status as provided by final comment 107(a)(18)–2. Financial institutions are also required to provide the same notices when requesting an applicant's LGBTQI+-owned business status, such as the notice that the applicant is not required to provide the information under final comment 107(a)(18)–1 and other notices under final comment 107(a)(18)–4. Other provisions set out in commentary for minority-owned and women-owned business statuses likewise apply to LGBTQI+-owned business status; for example, a financial institution reports only the applicant's response to the inquiry about its LGBTQI+-owned business status, even if it verifies or otherwise obtains an applicant's LGBTQI+-owned business status for other purposes. See, e.g., comments 107(a)(18)–6, –7, and –9.

Final comment 107(a)(18)–5 also clarifies that an applicant's responses about whether it is an LGBTQI+-owned business must be kept separately from the small business's application form and accompanying documents. ECOA section 704B(b)(2) requires a financial institution to maintain a record of the “responses to [the] inquiry” required by section 704B(b)(1) separate from the application and accompanying information. As explained in part E.2 in the Overview to this part V, the Bureau interprets section 704B(b)(2) to refer to an applicant's responses to protected demographic information, which includes whether the applicant is a minority-owned business and/or a women-owned business, and the ethnicity, race, and sex of the applicant's principal owners. This is because these data points require financial institutions to request demographic information that has no bearing on the creditworthiness of an applicant and that financial institutions would not be otherwise able to request absent the data collection requirements under section 1071 and the final rule as a result of Regulation B's general prohibition on inquiring about the sex of an applicant or any other person in connection with a credit transaction. Likewise, the Bureau considers the LGBTQI+-owned business status data point to be protected demographic information that has no bearing on an applicant's creditworthiness, as also noted by some commenters, and which financial institutions would be unable to collect without the requirement to do so in final § 1002.107(a)(18). As a result, the Bureau believes that it is necessary to require a financial institution to maintain an applicant's response to the inquiry about whether it is a LGBTQI+-owned business separately from the rest of the business's application and accompanying information under final § 1002.111(b), similar to the requirement with respect to responses about an applicant's minority-owned and women-owned business statuses.

The Bureau acknowledges commenters' concerns that requesting information as to whether applicants are LGBTQI+-owned businesses could be offensive, be considered an invasion of privacy by applicants, or damage bank-customer relationships. Final comment 107(a)(18)–4 provides that a financial institution must inform the applicant that Federal law requires it to ask for an applicant's minority-owned, women-owned, and LGBTQI+-owned business statuses to help ensure that all small business applicants for credit are treated fairly and that communities' small business credit needs are being fulfilled. Sample language for this notice, which provides a brief, plain language explanation of the purpose of the data collection, appears in the sample data collection form in appendix E. The Bureau believes providing such context will help to mitigate negative reactions an applicant may have to a financial institution's request for such information. Further, as stated on the sample data collection form, applicants have the right to refuse to provide this information, as provided under comment 107(a)(18)–1.

The Bureau acknowledges commenters' arguments that applicants are unlikely to respond to the inquiry about LGBTQI+ status and that therefore financial institutions should not be required to ask. However, the Bureau and other data users are unable to conduct comprehensive fair lending and business and community development analyses without this data point, even as applicants are individually entitled to refuse to provide it.

Some commenters expressed concern that LGBTQI+-owned business status could be detrimentally used against LGBTQI+ individuals and their businesses. As discussed in greater detail in part VIII below, the Bureau acknowledges that an individual person's LGBTQI+ status likely is sensitive personal information that could pose personal privacy risks as well as other non-personal commercial privacy risks. Part VIII also contains a more comprehensive analysis of how privacy interests may be appropriately protected. In addition, the Bureau is finalizing § 1002.110(e), which prohibits financial institutions and third parties from disclosing protected demographic information except in limited circumstances.

107(a)(19) Ethnicity, Race, and Sex of Principal Owners

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 proposed § 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.

Proposed § 1002.107(a)(20) would have required financial institutions to collect and report the ethnicity, race, and sex 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 have also required financial institutions to report, in certain circumstances, whether ethnicity and race are being reported by the financial institution on the basis of visual observation or surname analysis. Proposed § 1002.107(a)(20) would have required financial institutions to collect and report ethnicity, race, and sex data as prescribed in proposed appendix G. Proposed appendix G would have included 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 have also included a prohibition on financial institutions requiring applicants to provide this information. Proposed § 1002.107(a)(20) would have also required that when the financial institution requests ethnicity, race, and sex information from an applicant, the 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 this information. The Bureau also put forth for public comment a sample data collection form in proposed appendix E that financial institutions would be able use to collect ethnicity, race, and sex information.

The Bureau is finalizing the statutory requirement to collect principal owners' ethnicity, race, and sex in § 1002.107(a)(19). Below, the Bureau first discusses its general approach to collecting principal owners' ethnicity, race, and sex. Second, the Bureau discusses finalizing its proposal to collect ethnicity and race information using certain aggregate categories and disaggregated subcategories. Third, the Bureau discusses its approach to requiring the collection of sex by applicant self-identification (using only a free-form text field for a paper or electronic form, or by self-description for applications taken orally) and without the use of response categories. Finally, the Bureau discusses its decision not to require collection of principal owners' ethnicity and race via visual observation and/or surname analysis. The Bureau has incorporated information from proposed appendix G into the commentary to final § 1002.107(a)(19) and has updated a number of cross-references.

Proposed Rule—Collecting Ethnicity, Race, and Sex, In General

Proposed comment 107(a)(20)–1 would have clarified how a financial institution collects ethnicity, race, and sex information. It would have stated 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 have required financial institutions to inform the applicant that it is not required to provide the information. Proposed comment 107(a)(20)–1 would have further clarified 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 proposed 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 analysis. Proposed comment 107(a)(20)–1 would have cross-referenced proposed appendix G for additional instructions.

Proposed comment 107(a)(20)–2 would have explained 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 have also clarified that a financial institution may combine this non-discrimination notice with the similar non-discrimination notices that a financial institution would have been required to provide when requesting minority-owned business status and women-owned business status if a financial institution had requested 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)(20)–3 would have explained 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 have also provided examples of how responses could be recorded separately from the application and accompanying information.

Proposed comment 107(a)(20)–4 would have clarified that a financial institution is required to maintain procedures reasonably designed to collect applicant-provided information pursuant to proposed § 1002.107(c)(1), including 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 the principal owners' ethnicity and race based on visual observation and/or surname, the financial institution would have been required to report that the principal owner's ethnicity, race, or sex (as applicable) is “not provided by applicant.”

Proposed comment 107(a)(20)–12 would have clarified that a financial institution is neither 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. The Bureau also solicited comment on whether it would be useful to expressly codify this application of the principle in the commentary.

Additionally, the proposed comment would have explained 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 reports 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 analysis. Finally, the proposed comment would have explained that the financial institution does not report ethnicity, race, or sex pursuant to proposed § 1002.107(a)(20) based on information that the financial institution collects for other purposes.

Proposed comment 107(a)(20)–5 would have explained that generally an applicant determines its principal owners and decides whether to provide information about principal owners. It would have further stated that, nonetheless, a financial institution may be required to report ethnicity and race information based on visual observation and/or surname analysis and may need to determine if a natural person with whom the financial institution meets in person is a principal owner. It would have explained 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 have also provided examples of how the financial institution can make that determination and noted that the financial institution is not required to verify any responses regarding whether a natural person is a principal owner.

The Bureau sought comment on those proposed general aspects of collecting and reporting principal owners' ethnicity, race, and sex, including comments on the challenges that financial institutions may have implementing them.

Comments Received—Collecting Ethnicity, Race, and Sex, In General

The Bureau received comments regarding the collection of ethnicity, race, and sex for applicants' principal owners, in general, from a wide range of commenters including lenders, trade associations, community groups, individual commenters, a software vendor, and others. Within these general comments, commenters addressed a number of issues including alignment with HMDA, lack of applicant responses, verification of applicant-provided data, privacy issues, and concerns related to burden and cost. These issues, and others, are discussed in turn below.

General support and concerns. The Bureau received comments from lenders, trade associations, community groups, and others regarding its proposal, at a general level, for collecting information about the ethnicity, race, and sex of principal owners.

Many commenters supported the Bureau's proposal and the creation of a comprehensive small business lending database. These commenters said that collecting information about the ethnicity, race, and sex of small business applicants' principal owners will help address a lack of such information in existing lending data; facilitate enforcement of fair lending laws; and enable stakeholders to understand and identify needs and opportunities, remove barriers, and advocate for women-owned, minority-owned, and small businesses. Some commenters also emphasized generally that the data disclosure would shed light on racial and gender gaps and discrimination, which they noted are long-standing issues and which have been exacerbated by the COVID–19 pandemic. One commenter characterized the collection of this information as long overdue.

Many commenters expressing general support for the Bureau's proposal emphasized that the demographic data collected under the final rule must be robust, disaggregated, detailed, and include information on underwriting criteria and on race, gender identity, sexual orientation, and disability status in order to enable meaningful analysis.

Several lenders and a business advocacy group stated that the data would help lenders improve their lending practices. One commenter that Congress's adjustments to the SBA's Paycheck Protection Program in the program's second round, to prioritize minority-owned and women-owned businesses and microbusinesses and set aside funds for CDFIs, could not have happened without access to Paycheck Protection Program lending data, including demographic data. Another commenter stated that the small business lending data collection is necessary to gather critical data on lending beyond what is collected by the SBA.

Some commenters emphasized that HMDA data, which include demographic and socioeconomic information, have provided valuable insight on racial and income disparities in the home mortgage lending market and have been an important tool to hold lenders accountable as well as to determine how to meet unmet credit needs. Several commenters also emphasized that after Congress included demographic information as part of the HMDA data collection, the number of mortgages to people of color and people with modest incomes increased; these commenters anticipate a similar outcome for small business lending after data collected under this final rule are published.

One commenter stated that the collection of demographic data for each of an applicant's principal owners would help provide the public with a sense of the varying percentages of ownership by women or minorities above or below the 50 percent threshold for minority-owned or women-owned businesses and help determine if businesses with different minority ownership levels have distinct borrowing experiences.

The Bureau also received comments expressing generally applicable concerns and requests for clarification about its proposal for collecting ethnicity, race, and sex information. Several commenters said that the Bureau's proposal includes duplicative content in the proposed rule text, commentary, and appendices, which they said could complicate compliance. These commenters recommended that any mandatory requirements be in the final regulatory text, rather than spread out among the regulation, commentary, and appendices. Another commenter asserted that the proposed rules for collecting demographic information are too complex.

Another argued that a significant hurdle in implementing the Bureau's proposal is that while ECOA requires financial institutions to be blind to factors such as ethnicity, race, and sex in lending, they must collect and report information on those same factors under the Bureau's proposed rule (including by visual observation and surname analysis under certain circumstances). This commenter asserted that the Bureau's proposal is irreconcilable with ECOA and cannot be reasonably implemented without compromising the data collected. Another commenter predicted that requiring financial institutions to collect ethnicity, race, or sex information would lead to possible favoritism, discrimination, and stereotyping. (Similar concerns were raised specifically with respect to collection of ethnicity and race information by visual observation and/or surname analysis; these commenters are discussed separately below.)

One commenter asked the Bureau to clarify how a financial institution should report an applicant's principal owners' ethnicity, race, and sex information if a representative of a small business applicant states they need to check with the principal owners for such information, but the application is withdrawn or declined before the information is provided. The commenter stated that because borrowers may apply to many lenders for a loan, reporting on withdrawn applications would skew collected loan data. The commenter also asked for clarification about how to report under similar circumstances, where an application has been approved, but still no information has been provided. This commenter suggested the Bureau provide options for a financial institution to report that an applicant “declined to answer” for applicants that specifically refused to provide responses and “not available” for other circumstances, including withdrawn applications or applicant non-responsiveness.

Another commenter suggested that the Bureau should collect demographic data for “applicants,” which it characterized as the natural persons completing the application. This commenter argued that such information would further the fair lending purposes of section 1071, because loan applicants may be subject to different treatment based on factors such as their ethnicity, race, or gender, citing a study finding that prospective loan applicants were subject to differential treatment on the basis of their race and gender in the pre-application stage.

An industry commenter asked whether a financial institution could collect demographic information at a greater level of specificity than proposed by the Bureau. Another asked whether a financial institution is permitted to reconcile discrepancies or inaccuracies in self-reported ethnicity or race data with the use of software or other relevant information.

Alignment with HMDA. Some industry commenters urged the Bureau to align the collection of principal owners' ethnicity, race, and sex information under the final rule with the collection of such information for mortgage applicants under Regulation C, whether exactly or to the greatest extent possible. One commenter also suggested alignment with existing Regulation B, which also requires the collection of certain demographic information for certain mortgages. These commenters said that consistency between the HMDA and section 1071 data collections would reduce confusion for financial institutions and applicants, facilitate efficient data collection such as by allowing data to be collected only once for applications covered by both HMDA and section 1071, facilitate compliance, reduce burden, and make the collected data more usable across regulations.

Several commenters identified issues that could arise for applications reportable under both section 1071 and HMDA, if the data collection requirements under the two regulatory regimes did not match. They said that financial institutions could potentially be required to collect data using different forms and to have systems capable of maintaining separate sets of data for the same transaction under the Bureau's proposal. Some also said that applicant confusion about the differences between the two regimes may reduce applicants' willingness to provide the requested information. (Commenters more specific concerns about how overlapping data collection obligations would work are discussed in more detail below.) Some commenters generally urged the Bureau to either align the HMDA and section 1071 data collection requirements or to exempt loans from one regime that are reportable under the other to avoid such issues.

Concerns related to specific transactions or institutions. Some commenters expressed support for, or concerns about, the collection of principal owners' ethnicity, race, and sex information in the context of specific types of transaction or institutions.

Some commenters raised general concerns about the proposed collection of ethnicity, race, and sex information by small banks or community banks. A few commenters said that requesting ethnicity, race, and sex information has the potential to negatively impact their relationships with their customers. One stated that such inquiries could make customers distrustful of their banks and raise privacy concerns, and urged the Bureau to consider the impact that the collection of such information may have on the relationship-based banking model of community banks.

A number of commenters, including many agricultural lenders, expressed general support for the collection of demographic data. One commenter stated that the proposed collection of demographic information would help reveal and prevent unfair agricultural lending practices. Other commenters stated support for demographic data collection, provided that the rule's definition of small business is tailored for the agricultural credit context. One commenter expressed concern about the burden for collecting and reporting demographic information for agricultural lenders and farmers.

Some commenters emphasized particular difficulties for collecting ethnicity, race, and sex information for credit applications taken in retail environments (also referred to as “point of sale” applications/transactions). These commenters noted that credit applications taken in retail store environments differ from those typically taken at banks because customers expect speed and efficiency in the application process, and expressed their concern that the Bureau's proposal would add complexity and length to application processes, due in part to detailed questions about ethnicity, race, and sex. These commenters also expressed concerns about having retail store associates ask for this information. Commenters said that many retailers may use oral, interview-style, in-store application processes, and that retail store associates do not have the training to make such inquiries or handle customer questions or reactions. Several commenters also stated that small business applicants may feel uncomfortable providing ethnicity, race, and sex information in public retail spaces. Another commenter predicted that the majority of small business credit applications submitted at the point of sale would lack demographic information. Some of these commenters also urged the Bureau to exempt private label and co-branded credit applications, along with other types of credit originated at or facilitated through retailers such as revolving lines of credit and installment loans ( e.g., point of sale credit), from the rule's requirements in various ways—such as by exempting all such applications, or those for lines of credit below $50,000, from the requirement to collect demographic information.

A group of trade organizations stated that insurance premium finance transactions should not be included within the scope of the final rule, in part because State insurance law generally prohibits or discourages insurance agents from collecting information about race, religion, national origin, or ethnicity of an insured business's owners on behalf of lenders, and insurers do not collect such information as a result.

Several other trade associations urged the Bureau to clarify how the rule's data collection requirements apply to indirect vehicle finance transactions. Beyond generally urging the Bureau to exempt such transactions from the final rule, two trade associations stated a survey of their automobile and truck dealer members reflected concerns about training employees to collect ethnicity, race, and sex information, particularly with respect to implementing the Bureau's proposed visual observation and surname data collection requirement.

Lack of applicant responses. Several commenters raised concerns about a potential lack of applicant responses to the proposed demographic information questions. A bank stated that it encounters difficulties in meeting the HMDA reporting requirements because mortgage loan applicants are reluctant to provide demographic information and it anticipates similar reactions from small businesses. Other commenters argued that low demographic response rates in the Paycheck Protection Program indicates that most small business applicants will likely decline or fail to provide demographic information. Thus, some commenters said, records with missing demographic data will likely need to be either excluded from fair lending analyses or data users will have to use proxies for the missing information, asserting that this outcome calls into question the benefits of the data collection versus the costs. Another commenter said that the high number of applications for small business credit made online, and situations where the person providing information for a given application may be one of several owners or a company officer and not an owner themselves, may also lead to a high percentage of applicants who do not provide responses. One commenter asserted that small business owners may react negatively to the amount of paperwork associated with this rule's data collection requirements and as a result decide not to provide their principal owners' information. Finally, a commenter suggested that the Bureau require demographic information to be collected after a credit decision has been made, rather than before.

Verification. Several industry commenters and a women's business advocacy group argued that financial institutions should not be required or permitted to verify applicant-provided data about a principal owner's ethnicity, race, or sex. One commenter suggested that the Bureau should determine if there are ways for it to verify if reported data are accurate and correct. (Similar comments specifically regarding collection of information via visual observation or surname are discussed in more detail below.)

Reduced demand for traditional credit. Several industry commenters asserted that the collection of principal owners' protected demographic information could potentially make borrowing from traditional lenders less attractive for small businesses due to applicant discomfort or objections to inquiries for such information. One predicted that applicants may, as a result, turn to credit cards, payday loans, or nontraditional online financing for their credit needs.

Privacy. Several industry commenters stated that small business customers may find the collection of protected demographic information that could become public to be an invasion of privacy. They generally expressed concern that such information could be used to re-identify borrowers, which could in turn harm the reputation or image of a small business applicant. A bank said this concern is particularly salient in small communities, and that if public information is used to determine the identities of a bank's customers and the pricing terms offered to them, it could result in a competitive disadvantage for the bank versus other lenders.

Burden and costs for collecting ethnicity, race, and sex information. Several industry commenters raised concerns about the burden or compliance costs for financial institutions associated collecting principal owners' ethnicity, race, and sex information under the proposal. Other commenters raised similar concerns in the context of specific types of transactions or institutions, or related to specific aspects of the Bureau's proposal for collecting this information, which are discussed in the relevant parts of this section-by-section analysis.

One commenter expressed concern that financial institutions may need to increase the prices and fees for credit to cover increased compliance costs related to the collection and storage of ethnicity, race, and sex information. Another stated that collecting principal owners' ethnicity, race, and sex information would require online lenders to make system changes, which it said would be different from those needed by traditional lenders. This commenter urged the Bureau to allow lenders to report aggregate, as opposed to application level, data to reduce this burden. Another commenter said that because does not currently collect ethnicity information currently and its core processing system does not include a field for this information, it would need to collect this data field manually.

One commenter stated that collecting information for up to four principal owners as proposed would be burdensome for both financial institutions and applicants. A lender said that reporting such information for all principal owners would take a large amount of space on its small business lending application register. That commenter also suggested that the Bureau require demographic information for only one principal owner instead of all principal owners, asserting that this would not impact the quality of the data because the applicant's minority-owned and women-owned business statuses would still be collected.

In contrast, another lender did not anticipate incurring significant costs related to the collection of ethnicity, race, and sex information because it already gathers such information or similar information for other small business lending programs and funding opportunities such as the SBA's 7(a) Loan Program; the Paycheck Protection Program; the Wells Fargo Diverse Community Capital Program; and the CDFI Fund. The commenter stated that adjusting to section 1071 data collection requirements will primarily entail updating software, compliance training, and updating materials. The commenter anticipated minimal ongoing costs that will be considered normal costs of doing business and said it does not plan on raising fees or restricting access to credit as a result. The commenter also urged the Bureau to coordinate with the CDFI Fund to streamline section 1071 reporting requirements.

Direct reporting to the Bureau or third parties, or use of other data sources. A number of industry commenters suggested that protected demographic information should be self-reported by applicants directly to a central database or registry, whether maintained by the Bureau or by third parties.

Some commenters urged the Bureau to work with Secretaries of State so that demographic data generally or information about a business's minority-owned, women-owned, and/or LGBTQI+-owned business statuses are voluntarily registered at the same time that a small business registers with its State. One commenter stated that this would allow small businesses to provide information to a trusted entity and lenders could then verify demographic data with the relevant State—thus avoiding delays and confusion from applicants during the loan application process.

Other commenters suggested that the Bureau provide ways for small businesses to report their demographic information directly to the Bureau. Several suggested the Bureau develop a form for the collection of ethnicity, race, and sex information that could be sent directly to the Bureau. Others suggested that the Bureau establish a tool, portal, or online system for applicants to input their demographic information or to certify their desire to not provide information. One commenter stated that the regulatory trend has shifted from requiring collection and reporting of beneficial ownership information by financial institutions to having small businesses report directly to the government. Generally, these commenters said that applicants should be provided with a unique identifier, either by the Bureau or the financial institutions, that could be used to match applicant demographic information with loan information. Several commenters said that the financial institution should also be given the ability to match its records with the central database, to enable their internal fair lending compliance monitoring efforts. Some commenters also suggested the Bureau coordinate with other Federal agencies, such as the SBA, U.S. Department of the Treasury, Internal Revenue Service, or the U.S. Census Bureau, to develop the database, gather information for other data points, or purge records as necessary.

Some of these commenters stated that direct reporting to the Bureau would avoid the need for financial institutions to collect ethnicity and race information via visual observation or surname analysis. These commenters also stated that this would resolve privacy concerns applicants may have in providing demographic information to their lenders. Commenters also asserted that direct reporting would inform applicants of the Bureau's role in the data collection, promote applicant self-reporting of demographic information, and likely increase response rates because it would provide applicants with assurances of confidentiality and because applicants would not be concerned that financial institutions would improperly use the data.

Several commenters argued that direct reporting to the Bureau would have other benefits for financial institutions, including lessening or eliminating the risk of inappropriate use of demographic data by financial institutions; reducing a financial institutions' compliance costs and burden; avoiding the need for financial institutions to establish firewalls; lowering litigation and regulatory risk; reducing the risk of reputational harm for asking for sensitive data; and lowering barriers to entry in financial services. Commenters also stated that direct reporting would be more efficient for applicants because information would be maintained in one place and could be updated as needed, as opposed to being provided for each application. Commenters further suggested that the Bureau would benefit from receiving real-time data on applicant demographics, which they claimed would simplify and enhance analysis and publication and would allow the Bureau to directly manage the collection, storage, and standardization of the data.

Some commenters suggested that instead of requiring financial institutions to collect data, the Bureau should coordinate with other government agencies, like the Internal Revenue Service and the U.S. Census Bureau, which already collect demographic and other data on small businesses, to avoid burden to financial institutions and which would result in the Bureau having better data to use for analyses. One commenter suggested that the Bureau should use the demographic analysis approach being used by the U.S. Census Bureau and develop educational materials for financial institutions about the methodology. Another commenter suggested the Bureau buy information from Google or Facebook.

Applicant and financial institution education and guidance. A range of commenters urged the Bureau to provide education and guidance about the final rule for applicants, the public, and financial institutions. The commenters generally stated that the Bureau should engage in an education and/or media campaign to explain the final rule and its purposes to develop trust with small business communities and comfort for applicants by explaining the role of the data collection for facilitating fair lending and to encourage small businesses to provide their protected demographic information.

Many of these commenters also suggested that the Bureau develop guidance and materials such as frequently asked questions and factsheets to explain the rule and its purposes. A few commenters suggested developing materials for applicants regarding the ethnicity, race, and sex data collection inquiries, such as how to respond if a principal owner is multi-ethnic or multi-racial, so applicants can accurately respond and financial institution employees are not asked to interpret or clarify such requirements.

Commenters also recommended developing guidance materials for financial institutions to use in explaining the final rule, including training resources and disclosures to explain the reasons and purpose for the data collection. They also suggested that such materials be translated into the top ten languages spoken in the United States according to the U.S. Census Bureau.

Final Rule—Collecting Ethnicity, Race, and Sex, in General

For the reasons set forth herein, the Bureau is finalizing the requirement to collect principal owners' ethnicity, race, and sex with certain changes. Among other things, the Bureau is: (1) finalizing its proposed requirement for financial institutions to collect ethnicity and race information using aggregate categories and disaggregated subcategories, using the specific categories and subcategories in the proposal; (2) finalizing the requirement for financial institutions to collect information about a principal owner's sex, which generally will permit an applicant to respond to an inquiry about the principal owner's “sex/gender” through free-form text or self-description for oral applications; and (3) not finalizing its proposed requirement to collect and report at least one principal owner's ethnicity and race information on the basis of visual observation and/or surname analysis under certain circumstances. These three specific aspects of the final rule are each discussed in detail below.

Final § 1002.107(a)(19) (proposed as § 1002.107(a)(20)) requires financial institutions to collect and report information about the ethnicity, race, and sex of small business applicants' principal owners. In line with the proposal, final § 1002.107(a)(19) provides that when requesting such information from an applicant, the financial institution must inform the applicant that it cannot discriminate on the basis of a principal owner's ethnicity, race, or sex, or on the basis of whether the applicant provides this information (non-discrimination notice).

The final rule does not require a financial institution to report whether the reported ethnicity, race, and sex information was based on previously collected data (as permitted by proposed comment 107(c)(2)–7). This information would have provided additional context for the Bureau and others when application method was reported as being other than in-person but ethnicity or race information were reported as collected through visual observation or surname. Because the Bureau has decided not to require the use of visual observation and surname analysis in the final rule, however, the Bureau does not believe that capturing information about data reuse is still necessary and thus has removed that requirement from final § 1002.107(a)(19) to streamline and facilitate compliance.

The Bureau acknowledges commenters' concerns about repetition across the rule's regulatory text, commentary, and appendices, and has made a number of changes to reduce duplication and otherwise streamline this aspect of the final rule to facilitate compliance. In particular, the Bureau has removed proposed appendix G, relocating unique content into the commentary for final § 1002.107(a)(19). The Bureau has also adjusted the commentary accompanying final § 1002.107(a)(19) to reflect changes to the regulatory text described above, as well as the addition of LGBTQI+-owned business status where women- and minority-owned business statuses are mentioned.

Final comment 107(a)(19)–1 generally clarifies how a financial institution must ask an applicant for its principal owners' ethnicity, race, and sex. 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. It also establishes how a financial institution reports the applicant's responses to its inquiries about ethnicity, race, and sex.

Final comment 107(a)(19)–2 (incorporating instruction 3 from proposed appendix G) explains that a financial institution must provide an applicant with the definition of principal owner in final § 1002.102(o) and that a financial institution satisfies the requirement if it provides the definition as set forth in the sample data collection form in final appendix E.

Final comment 107(a)(19)–3 (incorporating instruction 2 from proposed appendix G) explains that a financial institution may combine on the same paper or electronic data collection form the questions about a principal owner's ethnicity, race, and sex with the number of the applicant's principal owners pursuant to § 1002.107(a)(20) and the applicant's minority-owned, women-owned, and LGBTQI+-owned business statuses pursuant to § 1002.107(a)(18).

Final comment 107(a)(19)–4 (based on proposed comment 107(a)(20)–2) explains that the non-discrimination notice required when a financial institution requests a principal owner's ethnicity, race, and sex may be combined with the non-discrimination notice that is required when requesting information about an applicant's minority-owned, women-owned, and LGBTQI+-owned business statuses, when such information is collected on the same form or at the same time. The comment has been updated to reflect the addition of LGBTQI+ business status to final § 1002.107(a)(18), and to state that a financial institution must (as opposed to “may” as proposed) inform an applicant that Federal law requires it to ask for the principal owners' ethnicity, race, and sex/gender to help ensure that all small business applicants for credit are treated fairly and that communities' small business credit needs are being fulfilled, for reasons discussed further below.

Final comment 107(a)(19)–5 (based on proposed comment 107(a)(20)–3) provides that a financial institution must maintain the record of an applicant's responses to inquiries pursuant to § 1002.107(a)(19) separate from the application and accompanying information, and cross-references final § 1002.111(b) and comment 111(b)–1.

Final comment 107(a)(19)–6 (based on proposed comment 107(a)(20)–4) addresses reporting when information about a principal owner's ethnicity, race, or sex is not provided by an applicant. While a financial institution must maintain procedures reasonably designed to collect applicant-provided data, the comment acknowledges that there may be circumstances under which an applicant does not provide ethnicity, race, or sex information. The final comment has also been updated to include explanatory examples, including examples from proposed appendix G (instruction 13).

Final comment 107(a)(19)–7 (adapted from instruction 12 in proposed appendix G) addresses how a financial institution reports an applicant's response that it declines to provide information about a principal owner's ethnicity, race, or sex.

Final comment 107(a)(19)–8 (adapted from instruction 16 in proposed appendix G) addresses how a financial institution reports an applicant's conflicting responses for its principal owner's ethnicity, race, or sex information, when the applicant selects a response option indicating it does not wish to provide the information but also selects an answer option providing a substantive response to the question at issue.

Final comment 107(a)(19)–9 (based on proposed comment 107(a)(20)–12) explains that a financial institution reports principal owners' ethnicity, race, and sex information as provided by the applicant, even if the financial institution verifies or otherwise obtains such information for other purposes. This comment no longer references collection of ethnicity and race via visual observation or surname.

Final comment 107(a)(19)–10 (substantially adapted from instruction 25 of proposed appendix G and proposed comments 107(a)(20)–6.iv, –7.iv, and –8) addresses how to report ethnicity, race, and sex information for an applicant with fewer than four principal owners.

Final comment 107(a)(19)–11 (substantially adapted from instruction 26 of proposed appendix G) explains that a financial institution reports one or more principal owners' ethnicity, race, or sex information based on previously collected data under § 1002.107(d), the financial institution does not need to collect any additional ethnicity, race, or sex information for other principal owners (if any).

Final comment 107(a)(19)–12 (substantially adapted from instruction 24 of proposed appendix G) explains that a guarantor's ethnicity, race, and sex is not collected or reported unless they are also a principal owner of the applicant.

General support and concerns. The Bureau agrees with commenters that the statutorily required collection of detailed ethnicity, race, and sex information about small business applicants' principal owners will facilitate the stated purposes of section 1071 to assist in the enforcement of fair lending laws and enable communities, governmental entities, and creditors to understand and identify needs and opportunities of women-owned, minority-owned, and small businesses. The collection of ethnicity, race, and sex information in the HMDA context under Regulation C, for example, is essential to the Bureau's efforts to monitor financial institutions for fair lending compliance in the home mortgage market and to efforts by the Bureau, policymakers, and others to identify trends, gaps, and potential solutions for addressing any issues uncovered by the data. Recent changes to Regulation C to collect disaggregated ethnicity and race data have also added to the Bureau's and others' understanding of the home mortgage marketplace. The Bureau believes that the collection of principal owners' ethnicity, race, and sex information will similarly provide important insights into the small business lending market and help enable the identification of potential discriminatory lending.

The Bureau also agrees that in combination with other collected information such as the number of an applicant's principal owners under final § 1002.107(a)(20) and whether the applicant is a minority-owned, women-owned, and/or LGBTQI+-owned small business under final § 1002.107(a)(18), the collection of principal owners' ethnicity, race, and sex information will help the Bureau and others to understand lending market dynamics at different levels of ownership by individuals of certain ethnicities, races, and/or sexual or gender population subgroups. Transparency will not only help facilitate fair lending enforcement, but reduce uncertainty for financial institutions and help them to identify areas of unmet credit demand into which they could consider increasing product availability. In turn, small business owners will benefit from increased credit availability. The Bureau believes that other information about a covered application is still important for fulfilling section 1071's statutory purposes even when the applicant has declined to provide any protected demographic information. Such information can still provide insight into lending to small businesses pursuant to section 1071's business and community development purpose. Moreover, the lack of demographic information for a covered application itself could be important information for the Bureau and others to assess potential reasons for and solutions to correct such information gaps in the future.

Regarding the comment its proposed rules for collecting demographic data are too complex, and comments that suggested streamlining these provisions, the Bureau notes that it is not finalizing the proposed requirement to collect ethnicity and race via visual observation or surname data. As a result, the Bureau has removed that provision, and related requirements, from the final rule. The Bureau has also moved all instructions and information about collecting and reporting ethnicity, race, and sex information to the commentary for final § 1002.107(a)(19). The Bureau believes these changes streamline and simplify the ethnicity, race, and sex data collection requirements, which will facilitate financial institutions' compliance with the final rule.

Regarding a commenter's assertion that this data collection requirement conflicts with ECOA, the Bureau notes that section 1071 amends ECOA to require the collection of the race, sex, and ethnicity of the principal owners of small businesses. Moreover, ECOA also provides that inquiries to collect data under section 1071 are not considered discrimination under the statute. The final rule also includes protections against the improper use of protected demographic information, including the firewall requirement in final § 1002.108, the provision restricting re-disclosure of protected demographic information in final § 1002.110(e), and the recordkeeping requirements in final § 1002.111(b).

Regarding a commenter's request for clarification as to how a financial institution should report these data if responses were provided by an applicant's representative before action is taken on the application, or that an applicant declined to provide the requested information. As discussed above, final comments 107(a)(19)–1, –6, and –7 clarify the various reporting options for reporting data collected pursuant to final § 1002.107(a)(19): financial institutions will be required to report an applicant's responses to the ethnicity, race, and sex inquiries; their selection of a response that they decline to provide information ( e.g., by selecting an answer option of “I do not wish to provide this information” or similar); and a response of “not provided by the applicant” if an applicant does not provide any response. The final rule also requires an applicant to report the action taken on an application under § 1002.107(a)(9), including whether originated or if the application was withdrawn by the applicant or is incomplete. Given these provisions, the Bureau does not believe it is necessary to include an option for a financial institution to indicate that the applicant or a principal owner was not available, as suggested by the commenter.

The Bureau is not requiring the collection of demographic information for a natural person completing an application on behalf of a small business, as suggested by a commenter. ECOA section 704B(e)(2)(G) specifically requires financial institutions to compile and maintain information about the ethnicity, race, and sex of “the principal owners of the business.” The statute does not require financial institutions to collect such information for any other individuals. The Bureau acknowledges the possibility of discrimination occurring against an applicant's non-principal owner representative, but in light of the statutory directive to collect demographic information about the applicant' principal owners, and the associated complexity that adding such a requirement could involve, the Bureau does not believe that it would be appropriate to adopt such a requirement at this time. The Bureau may, however, revisit at a later date whether the collection of such information would aid in fulfilling the purposes of section 1071 in the future as it enhances its understanding of the small business credit marketplace.

Regarding a commenter's inquiry as to whether a financial institution could collect more specific demographic data than required by the rule. Final § 1002.107(a)(19) establishes that financial institutions must inquire about applicants' principal owners' ethnicity, race, and sex and must permit applicants to provide certain specified responses; certain responses include the option of providing additional information via free-form text field.

One commenter asked whether a financial institution can reconcile discrepancies or inaccuracies in applicants' self-reported ethnicity or race data. Final comment 107(a)(19)–1 provides that the financial institution is not permitted to report a principal owner's ethnicity, race, or sex on any basis other than applicant-provided data, which may include previously provided data pursuant to final § 1002.107(d). As a result, financial institutions must report applicant responses as provided by the applicant, even if the institution perceives possible discrepancies or inaccuracies.

Alignment with HMDA. The Bureau generally agrees with commenters that some degree of alignment with the HMDA data collection requirements under Regulation C would promote consistency and may reduce potential confusion for financial institutions, applicants, and data users. However, the Bureau does not believe that the collection of data as to small business owners should necessarily be the same in each aspect as it is for home mortgage applicants. Although the collection of ethnicity, race, and sex data in both contexts serves related fair lending purposes, Regulation C and this final rule are authorized under different statutes and for different markets. Further, both Regulation C and this final rule were developed in consideration of the information available to the Bureau at the time of each rulemaking, including comments received in response to the Bureau's proposals and current research and standards as to the measurement of such factors. As demographic data collection best practices and standards evolve, the Bureau considers such information in its decision-making. The Bureau refers readers to the relevant parts of this section-by-section analysis for discussion of its rationale for its decisions on the collection of ethnicity, race, and sex.

The Bureau notes that it is exempting HMDA-reportable transactions from the data collection requirements of this final rule due to, in part, to commenters' concerns about potentially duplicative and/or inconsistent requirements for reporting ethnicity, race, and sex. See the section-by-section analysis of § 1002.104(b)(2) for additional information.

Concerns related to specific transactions or institutions. The Bureau is not adopting special rules for the collection of protected demographic information for particular types of transactions or lenders. The Bureau believes it is important to collect nationwide, comprehensive ethnicity, race, and sex data for all covered applications to fulfill the purposes of section 1071. However, the Bureau acknowledges commenters' concerns about the potential challenges in collecting such information in certain situations or for certain types of lenders and appreciates, in particular, the importance of trust in furthering important relationships between small businesses and their local banks. For this reason, among others, the Bureau is not finalizing its proposal to collect ethnicity and race information via visual observation or surname analysis, as explained further in the relevant part of this section-by-section analysis below.

To help applicants' understanding of the section 1071 data collection, the Bureau has made edits to the sample data collection form in final appendix E to include sample text that explains the purpose of the rulemaking and clarifies that the inquiries on the form for an applicant's status as a minority-owned, women-owned, and/or LGBTQI+-owned small business and its principal owners' ethnicity, race, and sex information are required under Federal law. The sample form, of course, continues to note that applicants are not required to provide any of the requested demographic information. The Bureau also anticipates developing materials to help small businesses understand the rule, as described at the end of part I above.

The Bureau does not believe that agricultural credit transactions should be viewed or treated differently from other covered transactions under the final rule, with regard to the collection of principal owners' ethnicity, race, or sex information. As explained in the section-by-section analysis of § 1002.104, generally there is insufficient information available about agricultural credit markets; nevertheless, there is evidence that these markets are affected by historical and/or continuing discrimination. Moreover, farms are an important means of capital formation for families and communities. Collecting principal owners' ethnicity, race, and sex information for agricultural credit transactions will help facilitate the Bureau's and others' understanding of the agricultural credit sector of the small business lending marketplace and will help to further the enforcement of fair lending laws for that part of the market. The Bureau also anticipates that the collection of this information may increase access to responsible and affordable agricultural credit for a diverse cross-section of the population, by helping creditors and others identify needs of and opportunities for small farms, including those that are minority-, women-, and/or LGBTQI+-owned.

Likewise, the Bureau is not adopting separate rules or exemptions for credit applications taken at point of sale. As explained further in the section-by-section analysis of § 1002.107(c), regarding the time and manner of collection, the Bureau generally believes that the same rules should apply across all covered credit transactions and covered financial institutions, and that the arguments made by point of sale providers are not unique in nature or can be addressed through other means. Likewise, the Bureau does not believe there should be special considerations for the collection of ethnicity, race, and sex information for private label credit, for which commenters raised similar concerns.

Because the Bureau is exempting insurance premium financing transactions from coverage under the final rule in § 1002.104(b)(3), commenters' concerns summarized above about collecting protected demographic information for such transactions are rendered moot.

With regard to comments raising concerns about collecting ethnicity, race, and sex information in the context of indirect auto finance transactions, the Bureau refers readers to its discussion at the section-by-section analysis of § 1002.109(a)(3). As discussed there, the Bureau believes that auto dealers are generally unlikely to be collecting 1071 data on behalf of covered financial institutions because they are often the last entity with authority to set the material credit terms of a covered credit transaction. But even in situations where dealers are acting as conduits and are thus collecting information on behalf of another financial institution, comment 5(a)(2)–3 to the Board's Regulation B states 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 also does not believe that any specialized knowledge is necessary to collect 1071 data if dealers do collect such data.

Lack of applicant responses. The Bureau acknowledges concerns raised by commenters about the potential for low applicant response rates to the required inquiries for information about their principal owners' ethnicity, race, and sex. As discussed in the NPRM, such concerns motivated the Bureau's proposal to require financial institutions to collect at least one principal owner's ethnicity and race information through visual observation and/or surname analysis under certain circumstances. The Bureau explained that the similar data collection requirement for the HMDA data collection has been an important tool in supporting response rates.

As discussed in more detail regarding the Bureau's proposal that financial institutions collect principal owners' ethnicity and race via visual observation or surname in certain circumstances, the Bureau believes that such a requirement could help support response rates in the right context. However, at this time, the Bureau has elected to address concerns about applicants' potential unwillingness to voluntarily provide their principal owners' ethnicity, race, and sex information by providing further clarification as to the requirement that an institution maintain procedures to collect applicant-provided data at a time and in a manner that are reasonably designed to obtain a response under final § 1002.107(c). For example, final § 1002.107(c)(2) sets forth minimum criteria when collecting applicant-provided data directly from the applicant that must be included within a financial institution's procedures to ensure they are reasonably designed to obtain a response, including seeking to collect such information before notifying an applicant of action taken on a covered application, ensuring that the request for applicant-provided data is prominently displayed or presented, ensuring the collection does not have the effect of discouraging applicants from providing a response, and ensuring that applicants can easily respond to a request for the data. The Bureau also anticipates developing materials to educate small business owners about the small business lending data collection and its purposes, which may impact their willingness to provide demographic information. Further, as discussed in the section-by-section analysis of final appendix E, the sample data collection form will also include language that explains, in plain language, the purpose for the collection of demographic information under the final rule. At this time, the Bureau believes that these measures will improve applicant response rates to the protected demographic information inquiries under the final rule. However, the Bureau will continue to assess whether and what further measures may be needed to improve response rates.

The Bureau's decision not to change the timing for collecting protected demographic information to after a credit decision has been made, as suggested by a commenter, is discussed in the section-by-section analysis of § 1002.107(c).

Verification. Commenters urged the Bureau to provide that financial institutions are not permitted or required to verify the ethnicity, race, or sex of a principal owner and to codify this requirement in the final rule. The Bureau agrees. Final comment 107(a)(19)–9 clarifies that a financial institution may only report an applicant's responses as to its principal owners' ethnicity, race, and sex, even if it verifies or otherwise obtains the information for other purposes.

Reduced demand for traditional credit. The Bureau appreciates some commenters' concerns that inquiries about their principal owners' ethnicity, race, and sex information might discourage small businesses from seeking credit with traditional lenders. The Bureau anticipates that while there may be some period of initial hesitation by small businesses to provide such information, small businesses will become more familiar with the requests for their demographic information over time and such requests will be considered a normal part of the process for seeking business credit. Further, as described at the end of part I above, the Bureau anticipates developing and distributing materials about the final rule directed at small businesses. The Bureau also expects that such materials, by furthering applicant understanding of the 1071 data collection, will ease the compliance burden for financial institutions in implementing the final rule.

Privacy. The Bureau received comments generally expressing concerns that small businesses' owners' demographic information could be used to identify the businesses and their owners. As discussed in greater detail in part VIII below, after receiving a full year of reported data, the Bureau will assess privacy risks associated with the data and make modification and deletion decisions to the public application-level dataset. The Bureau takes the privacy of such information seriously and will be making appropriate modifications and deletions to any data before making it public, and intends to continue engage with the public about how to mitigate privacy risk.

With respect to concerns that small business applicants may find the collection of protected demographic information to be an invasion of privacy, in amending ECOA to require the collection of an applicant's principal owners' ethnicity, race, and sex information, Congress implicitly determined that the benefits of collecting such information outweigh any invasion of privacy concerns. Nevertheless, the Bureau notes that it has included sample language in the sample data collection form in appendix E explaining the purpose of the data collection, and, as noted, it anticipates developing materials to further help small businesses understand the purposes of the rule. In addition, the final rule provides safeguards for applicants' protected demographic information by requiring that such information be kept separately from their applications and accompanying information under § 1002.111(b), through the firewall requirement in § 1002.108, and in § 1002.110(e) restricting financial institutions' re-disclosure of protected demographic data to third parties.

Burden and costs for collecting ethnicity, race, sex information. The Bureau appreciates that financial institutions will face some initial costs and burden in implementing the final rule, such as from making changes to its policies, procedures, systems, training programs, and in other areas. However, as noted by one commenter, the Bureau believes that for many financial institutions covered by the final rule, there will be manageable ongoing costs related to the data collection after an initial implementation period.

The Bureau does not believe it would be appropriate to permit financial institutions to report only aggregate data, as opposed to application-level data, as suggested by one commenter. First, the statute clearly contemplates the collection of individual loan-level information. Section 1071's information gathering requirement provides that a financial institution is required to collect and maintain information “in the case of any application to a financial institution . . .” (emphasis added). Further, the statute requires the financial institution to compile and maintain “a record of the information provided by any loan applicant,” including loan identifying information such as the number of the application and the date on which the application was received. Given this language, the Bureau believes that Congress intended that financial institutions compile and maintain application-level information and submit the information—compiled in that way—to the Bureau.

Second, the Bureau believes that it is necessary to have specific ethnicity, race, and sex data for individual principal owners to allow assessments of whether there are trends in the data, including for businesses with different amounts of ownership by individuals of certain ethnicities, races, or sex, which cannot be captured through the minority-owned, women-owned, and LGBTQI+-owned business status data points alone. As a result, the Bureau rejects a commenter's suggestion that the Bureau require the collection of only one principal owner's ethnicity, race, and sex information.

Direct reporting to the Bureau or third parties, or use of other data sources. The Bureau is not, at this time, establishing a mechanism by which small businesses might directly submit demographic information to the agency. The Bureau notes, in this respect, that the statute calls for financial institutions to collect these data and report them to the Bureau. In addition, the mechanisms described by the statute do not envision the Bureau ever knowing the identity of any small business submitting data, which would occur if small businesses were to file demographic data directly with the Bureau.

However, the final rule does not foreclose industry from developing mechanisms to make demographic data collection and submission more effective or efficient. For example, industry might seek to foster the development of third-party mechanisms that would let financial institutions collect and report demographic information in tokenized form so that they themselves do not have access to that demographic data. To the extent that industry stakeholders are interested in the development of such mechanisms in connection with meeting their obligations under the final rule, the Bureau is willing to engage with them on these issues in order to ensure that any such developments ensure appropriate data quality and protection, do not burden or create obligations for applicants, and otherwise accord with the rule and the statute; to the extent necessary and appropriate, the Bureau would also need to adjust certain regulations and technical guidance. In considering appropriate data quality and protection, the Bureau will want to ensure that such a third-party system does not compromise privacy or other important protections or create opportunities for the sale of personal data.

Some commenters suggested that, as opposed to requiring financial institutions to collect and report demographic data, the Bureau should instead use data, for example, that is gathered by other Federal agencies or buy it from outside sources. However, Congress's intent with ECOA section 704B was to require financial institutions to collect demographic information from applicants that would then be reported to the Bureau. Gathering such information from other sources would not be aligned with this intent. Further, the Bureau believes that requiring financial institutions to collect demographic information during the application process will help to ensure comprehensive, nationwide demographic data collection about small business lending, which will in turn help enable the identification of potential discriminatory lending practices and identification of the needs and opportunities of small businesses, including women-owned, minority-owned, and LGBTQI+-owned businesses. Data that have been collected in other contexts and for other purposes, and analyzed pursuant to those agencies' methods for those other purposes, would not achieve what the Bureau believes is necessary to meet section 1071's statutory objectives. Further, some of the approaches suggested by commenters would not be feasible, such as buying data from sources outside of the Federal government, because they do not identify a small business applicant's principal owners. The Bureau also notes that it has worked with other Federal regulators so that they can tailor data collections in this area to take advantage of data collected under this rule, thereby reducing burden on regulated entities.

Applicant and financial institution education and guidance. With respect to commenters' requests that the Bureau educate and explain the final rule and its requirements to small business applicants, the public, and financial institutions, and to provide translations of the sample data collection form into other languages, the Bureau refers readers to its discussion regarding compliance and technical assistance at the end of part I above. Likewise, the Bureau agrees with commenters that it is important to provide a disclosure to applicants to generally explain the rule and its purpose. Instruction 4 to proposed appendix G would have explained that a financial institution may inform applicants 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. In response to comments about the importance of helping applicants to understand the reasons for the data collection, under the final rule financial institutions are required to provide such information (see final comment 107(a)(19)–4); sample language effecting this provision is included on the sample data collection form at appendix E.

Proposed Rule—Collecting Ethnicity and Race Using Aggregate Categories and Disaggregated Subcategories

The Bureau proposed 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 proposed using 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 proposed using the same aggregate categories as are used in Regulation C ( i.e., American Indian or Alaska Native; Asian; Black or African American; Native Hawaiian or Other Pacific Islander; and White). The Bureau also proposed using the same disaggregated subcategories for the Asian race category and the Native Hawaiian or Other Pacific Islander race category, as well as with respect to the American Indian or Alaska Native race category, including by inviting an applicant to provide the name of a principal or enrolled tribe. In addition, the Bureau proposed adding disaggregated subcategories for the Black or African American race category, which are not used when collecting data pursuant to Regulation C.

The Bureau explained that OMB has issued standards for the classification of Federal data on ethnicity and race. OMB's government-wide standards provide a minimum standard for maintaining, collecting, and presenting data on ethnicity and race 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 ethnicity and race by Federal agencies.” 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 proposed to use in the section 1071 final rule, conform to the OMB standards.

The Bureau also explained that in addition to the minimum data categories for ethnicity and race, the OMB's standards 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. 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 compromise data quality or confidentiality standards.

The Bureau noted that 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 stated 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.

The Bureau further explained that 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. 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. The Working Group also considered whether race and ethnicity should be collected using separate questions versus a combined question. The OMB Federal Data Standards on Race and Ethnicity have not been updated, however, in the time since OMB's 2017 request for comment.

The Bureau stated its belief that 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. 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.

The Bureau explained that 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, 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. 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.

The Bureau noted that on February 28, 2017, the Census Bureau released its 2015 National Content Test: Race and Ethnicity Analysis Report. This National Content Test 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 National Content Test'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. 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”).

The Census Bureau did not ultimately incorporate these design elements into the questionnaire for the 2020 Decennial Census, but instead 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. Notwithstanding the approach used by the Census Bureau for the 2020 Decennial Census, the Bureau requested 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 burdens on financial institutions collecting and reporting this information.

The Bureau proposed that financial institutions must permit applicants to provide a principal owner's ethnicity and race using the aggregate categories used for HMDA data collection, which conform to the OMB standards. The Bureau believed that aligning the aggregate ethnicity and race categories for this rule's data collection with the HMDA data collection would promote consistency and could reduce potential confusion for applicants, financial institutions, and other users of the data.

The Bureau also proposed that applicants must be permitted to provide a principal owner's ethnicity and race using the disaggregated subcategories used in HMDA data collection, which also conform to one of the key principles in the OMB standards: encouraging the collection of greater detail 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. With respect to ethnicity data collection, the Bureau proposed 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 proposed 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. The Bureau also proposed that applicants must be permitted to provide a principal owner's race using disaggregated subcategories for the Black or African American race category, which is not currently used in HMDA data collection. Lastly, similar to HMDA, the Bureau proposed inviting 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.

The Bureau explained that it was proposing use of disaggregated subcategories for this rulemaking, in part, for general consistency with existing HMDA reporting requirements. Further, 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 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. The Bureau noted that additionally, as suggested in the 2015 National Content Test: Race and Ethnicity Report Analysis, the use of disaggregated subcategories may increase response rates.

The Bureau acknowledged, however, 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 sought 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. The Bureau also noted that FinCEN's customer due diligence 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. The Bureau did not propose this approach given the different purposes and requirements of the customer due diligence rule (as well as FinCEN's related customer identification program rule) and section 1071. Nonetheless, the Bureau sought 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.

The Bureau also sought 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 proposed addition of disaggregated subcategories for the Black or African American category. Additionally, the Bureau sought 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 sought comment on whether any additional or different categories or subcategories should be used for section 1071 data collection, and whether the collection and reporting of ethnicity and race should be combined into a single question for purposes of section 1071 data collection and reporting. The Bureau further sought 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 sought 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 also sought comment on whether the approach and design elements set forth in the 2015 National Content Test: Race and Ethnicity Report Analysis 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 sought 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 comments 107(a)(20)–6 and –7 would have provided guidance on collecting and reporting ethnicity and race information, respectively. The proposed comments would have explained that applicants must be permitted to provide a principal owner's ethnicity or race using aggregate categories and disaggregated subcategories and would have also listed the aggregate categories and disaggregated subcategories that applicants must be permitted to use. The proposed comments would have also explained 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. The proposed comments would have stated that, if an applicant provides ethnicity or race information for a principal owner, the financial institution reports all of the aggregate categories and disaggregated subcategories provided by the applicant, and the proposed comments would have provided examples. The proposed comments would have stated that a financial institution must also permit the applicant to refuse to provide ethnicity or race information for one or more principal owners and explain how a financial institution reports ethnicity or race information if an applicant declines to provide the information or fails to respond. Finally, the proposed comments would have explained how a financial institution reports ethnicity or race information if an applicant has fewer than four principal owners, and they would have provided examples.

Comments Received—Collecting Ethnicity and Race Using Aggregate Categories and Disaggregated Subcategories

The Bureau received comments from a range of commenters, including lenders, trade associations, community groups, and a business advocacy group, on its proposal to collect ethnicity and race using aggregate categories and disaggregated subcategories.

Several banks and a group of trade associations opposed the proposal to collect ethnicity and race information using disaggregated subcategories. Specifically, these commenters asserted that the disaggregated subcategories do not add value to fair lending reviews or findings in the HMDA context because there is not enough disaggregated subcategory data from which to draw fair lending conclusions, as mortgage applicants do not often use the disaggregated subcategories. Thus, they said, disaggregated subcategories should not be adopted for this data collection. The group of trade associations also stated that the Bureau's analysis of 2018 HMDA data shows that mortgage applicants largely selected one ethnicity or race field and asserted that the Bureau has not shown that small business credit applicants are likely to behave differently. A small business owner also objected to the Bureau's proposal on the grounds that applicants would not report the ethnicity and race of their principal owners accurately and, if faced with a long list of categories, would choose not to report. This commenter also asserted that the Bureau's proposal does not align with other government data collections and would hinder data analysis.

Two of those banks and the group of trade associations also objected on the grounds that collecting disaggregated data in the HMDA context has been burdensome and frustrating for applicants and lenders. The trade associations also argued that including disaggregated subcategories would impose more burden than under Regulation C because ethnicity and race data would need to be collected for up to four principal owners under the Bureau's proposal, whereas it would generally be collected for only one or two applicants for the HMDA data collection. This commenter also emphasized that for ethnicity and race data collection under Regulation C, financial institutions are required to read aloud all of the ethnicity and race disaggregated subcategories when taking a mortgage application over the phone, which the commenter asserted has been frustrating for mortgage applicants and would likely be frustrating for small business applicants as well.

The group of trade associations and a bank further argued for use of only the aggregate categories currently used in Regulation C and the OMB Federal Data Standards on Race and Ethnicity, without any new aggregate or disaggregated categories. As discussed above regarding general comments about the Bureau's proposal for collecting ethnicity, race, and sex, the Bureau also received some comments requesting that demographic information collection generally (including on race and ethnicity) for this rule should be the same, or similar to the greatest extent possible, as for Regulation C.

In contrast, many community groups and a minority business advocacy group, as well as some industry commenters, generally supported collecting ethnicity and race using aggregate categories and disaggregated subcategories as proposed by the Bureau. These commenters stated that collecting detailed, disaggregated ethnicity and race data on small business applicants' owners, and particularly for those of color, will over time provide transparency as to the different experiences of racial and ethnic subgroups in the small business lending marketplace, further fair lending enforcement, and support the objectives of section 1071. Several commenters emphasized that disaggregated data will help capture potential discrimination and allow for targeted support. One stated that the proposal will add nuance to fair lending assessments and that aggregate racial and ethnic categories mask economic disparities and differences in social capital and experiences.

Many of these commenters highlighted that HMDA data has revealed that racial and ethnic subgroups have different experiences in the home buying market. These commenters argued that, similarly, disaggregated ethnicity and race data are necessary to allow assessments in the small business lending marketplace. Several of these commenters specifically noted that research based on 2019 HMDA data shows that Asian American and Pacific Islander communities and Hispanic/Latino subgroups fare differently in the mortgage market. One commenter noted, as an example of different experiences, that participants in its homebuying seminars have stated that language barriers often create difficulties in the home buying process. Other commenters noted the importance of disaggregated data for business lending specifically, generally citing findings in the Federal Reserve Banks' Small Business Credit Survey: 2021 Report on Employer Firms that firms owned by people of color were less likely to receive the full of amount financing sought than white-owned businesses.

Some commenters stated that they supported the Bureau's proposed approach of generally aligning with HMDA's aggregate categories and disaggregated subcategories for ethnicity and race and also adding new disaggregated subcategories. Two commenters affirmed that the HMDA ethnicity and race categories and subcategories are also relevant for small business lending. A lender commented that this approach will reveal different experiences in the small business lending market, but also provide familiar reporting standards. Another lender stated that aligning many of the ethnicity and race categories with those for HMDA would promote consistency and reduce confusion. One community group stated that based on the HMDA experience, it anticipates that applicants will not have difficulty understanding the information being requested regarding race as long as the sample form is clear for both lenders and applicants to follow.

Many commenters also supported the specific ethnicity and race aggregate categories and disaggregated subcategories proposed. Some called out their support for particular groups of disaggregated subcategories, for example for the Hispanic/Latino population, Asian, and Native Hawaiian or Other Pacific Islander aggregate categories. Some commenters noted that none of these communities are monoliths and different subgroups have different experiences in seeking credit. One commenter made a similar statement regarding African American and African immigrant communities in the residential mortgage context.

A community group operating in New York City suggested adding certain subgroups listed as examples in the Other Latino or Hispanic disaggregated ethnicity subcategory and in the Other Asian disaggregated race subcategory. The community group suggested adding an ethnicity subcategory for Dominican, because in New York City Dominicans make up a larger percentage of the population than Puerto Ricans, one of the proposed disaggregated ethnicity subcategories. The commenter also suggested adding Colombian, Ecuadorian, and Honduran disaggregated ethnicity subcategories. This commenter further suggested adding Bangladeshi and Pakistani disaggregated race subcategories, under the Asian aggregate race category, stating that these populations make up 6 percent and 8 percent, respectively, of the Asian population in New York City.

Many commenters expressed specific support for the proposed disaggregated Black or African American race subcategories. One commenter stated that there are distinct differences in the experiences and treatment of different subgroups and that many of these subgroups have tight-knit communities and thus it is important that this data collection captures such nuances, and another stated that disaggregation generally has proven to have value in the HMDA context.

Regarding the American Indian or Alaska Native aggregate race category, several commenters supported the Bureau's proposal to include a write-in text field for an applicant to name a principal owner's enrolled or principal tribe, though some also were concerned that there would be insufficient information on indigenous small business owners as a result of small sample sizes, which could mask the credit needs of that community.

Some commenters supported adding an additional category for Middle Eastern or North African in the final rule, in response to the Bureau's request for comment. One commenter stated that individuals of Middle Eastern or North African descent are often left with little choice but to select White as their race, despite a long history of discrimination in the United States, and that adding this category would meet the spirit of section 1071. Several other commenters stated that a Middle Eastern or North African category should be added to capture discrimination against and barriers for applicants of Middle Eastern or North African descent. A couple of commenters suggested that North African and Middle Eastern could be addressed as its own category or as disaggregated subcategories. However, a group of trade associations argued against the proposal for a Middle Eastern or North African category, noting that OMB never finalized its proposal to include such a category in its Federal standards on race and ethnicity.

Regarding disaggregated ethnicity and race categories generally, a joint letter from community groups and business advocacy groups suggested that the Bureau provide in the final rule that the ethnicity and race categories will be maintained and updated in alignment with OMB's standards and that the specifications will be adjusted in filing instructions that the Bureau issues from time to time.

Several commenters responded to the Bureau's request for comment on whether to combine the proposed questions about ethnicity and race. These commenters did not support combining the questions. A group trade associations noted that while the Census Bureau's 2015 National Content Test: Race and Ethnicity Report Analysis showed that many individuals that select Hispanic or Latino as their ethnicity do not make any race selections because they do not identify with the aggregate race categories, the race and ethnicity questions were ultimately not combined for 2020 Decennial Census. The commenter also reiterated that the questions are separate for HMDA data collection purposes, and stated that the same approach should be used for this rule to maintain consistency across data collection rules and with the Census Bureau's approach, reduce burden for financial institutions, and facilitate data analyses.

One commenter urged the Bureau to allow applicants to provide an additional disaggregated subcategory in addition to those specified in the proposal beside “other” in a text field in the same manner that American Indian or Alaska Natives can identify tribal affiliation. The commenter stated this would allow applicants to write in responses such as Nicaraguan or Hmong that may provide important additional information for fair lending enforcement.

A bank asserted that for the ethnicity and race data collection under Regulation C, when applicants select a disaggregated ethnicity or race subcategory, the selection prevents the applications from being associated with the corresponding aggregate category. The commenter stated that this issue impacts how some lenders' application and origination performance with specific communities appears and urged the Bureau to fix the issue in the Regulation C data collection and ensure it is not replicated for the section 1071 data collection.

Final Rule—Collecting Ethnicity and Race Using Aggregate Categories and Disaggregated Subcategories

For the reasons set forth herein, the Bureau is finalizing its proposal to collect information about the ethnicity and race of principal owners using aggregate categories and disaggregated subcategories generally as proposed. However, the Bureau has revised the commentary related to the collection of ethnicity and race data to reduce repetition among the appendices and the commentary and to reflect other changes, as explained below.

The Bureau agrees with commenters that the disaggregated ethnicity and race subcategories will provide meaningful data that will further section 1071's purposes. Such data will be beneficial in identifying potential discrimination or business and community development needs in particular communities, including by providing insight into variations in borrowing experiences by ethnicity and race across the small business lending marketplace, even if not all applicants make ethnicity or race disaggregated subcategory selections. For example, in the HMDA context, the Bureau has used disaggregated race data collected under Regulation C to find that some Asian American and Pacific Islanders subgroups fare better than others in the mortgage market. Other data users have been able to draw conclusions and make policy recommendations to address differences and disparities in home lending among subgroups in the Hispanic or Latino community using disaggregated HMDA subcategories. The Bureau believes that disaggregated ethnicity and race data in the section 1071 data collection will similarly advance section 1071's purpose in enabling communities, governmental entities, and creditors to identify business and community development needs and opportunities of businesses with owners that are members of ethnic and racial subgroups, regardless of whether those businesses meet the definition of a minority-owned small business.

With respect to the fair lending enforcement purpose of section 1071, 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. However, the Bureau believes there will be—as has proven to be the case in the HMDA data—situations in which the numbers are sufficient to permit such fair lending assessments. The Bureau also believes that the use of disaggregated subcategories may increase ethnicity and race response rates by small business applicants. Requiring the collection of disaggregated race and ethnicity data also follows a key principle set forth in the OMB Federal Data Standards on Race and Ethnicity to encourage applicants to self-identify their principal owners' race and ethnicity, by providing more inclusive options for applicant self-reporting.

The Bureau is not, at this time, adding additional disaggregated ethnicity and race subcategories beyond those set forth in the NPRM. While one commenter suggested adding a few disaggregated ethnicity and race categories, such suggestions were based on the demographics of a specific city and it is unclear whether they would provide useful data in a nationwide data collection. The Bureau notes that if an applicant's principal owner does not clearly identify with any of the listed disaggregated ethnicity or race subcategories associated with a specific aggregate ethnicity or race category, many of the aggregate ethnicity and race categories have an associated “Other” disaggregated subcategory ( e.g., “Other Hispanic or Latino,” “Other Asian,” “Other Black or African American,” and “Other Pacific Islander”) that give the applicant opportunities to provide a specific subcategory not listed or otherwise provide additional ethnicity or race information.

The Bureau also is not adding a separate, disaggregated subcategory for applicants to write in ethnicity or race information, as suggested by a commenter. The Bureau recognizes that some applicants may not clearly identify with the Bureau's designated ethnicity and race aggregate categories and disaggregated subcategories, despite the “Other” disaggregated ethnicity and race subcategories associated with the aggregate ethnicity and race categories in the final rule. The Bureau also notes that the 2020 Decennial Census and the Census Bureau's American Community Survey include a separate “Some Other Race” category, which provided respondents with the ability to write in additional information. However, the Census Bureau's use of this race category is statutorily required and the best practice for Federal agencies is to not include a “Some Other Race” category unless required by law. The Bureau believes it is important that the race and ethnicity information be capable of being aggregated to or associated with the five OMB aggregate categories for race and the two aggregate categories for ethnicity in the OMB Federal Data Standards on Race and Ethnicity to facilitate the Bureau's and others' ability to analyze and use the collected data. As noted above, applicants will be able to use the associated “Other” disaggregated subcategories associated with many of the aggregate race and ethnicity categories to provide their principal owners' information and, as clarified by final comments 107(a)(19)–13 and –14, will also be able to make multiple selections for their principal owners' race and/or ethnicity to accurately reflect their racial and ethnic identities.

The Bureau likewise is not combining the questions about ethnicity and race at this point in time. Commenters generally did not support or did not state a position on combining the ethnicity and race questions. The Bureau notes that the 2020 Decennial Census and the 2022 American Community Survey also do not combine the questions.

Some commenters expressed concern that the Bureau's proposal for the American Indian or Alaska Native aggregate race category, which does not have specifically listed disaggregated subcategories but permits applicants to write in the name of a principal owner's enrolled or principal tribe, would lead to small sample sizes and thus insufficient information to make assessments about indigenous small business owners and those communities. At this time, the Bureau is not making any changes to its approach for the American Indian or Alaska Native aggregate race category. The Bureau notes that the Census Bureau's 2020 Decennial Census and 2022 American Community Survey similarly listed American Indian or Alaska Native as an aggregate race category, do not list specific disaggregated subcategories, and ask respondents to “Print [the] name of enrolled or principal tribe(s)” along with suggested write-in options. As explained in the 2015 National Content Test: Race and Ethnicity Race Report Analysis, there are hundreds of American Indian and Alaska Native tribes, villages, and groups, and checkboxes for the largest groups would only represent a small percentage of the American Indian and Alaska Native population. Given this research, the Bureau believes that its approach to the American Indian or Alaska Native aggregate race category is appropriate and is thus not including a list of suggested write-in examples at this time.

The Bureau has also decided against specifically collecting data on Middle Eastern or North African populations at this point in time, whether as an aggregate ethnicity or race category, a disaggregated ethnicity or race subcategory, or through some other inquiry, due to uncertainty about how a Middle Eastern or North African category should be defined. As detailed in the NPRM, the Census Bureau and OMB have considered, over the course of years, whether to include a separate Arab or North African, or alternatively Middle Eastern or North African, classification in the Decennial Census and the Federal Data Standards on Race and Ethnicity. But, despite a 2017 recommendation by a Federal interagency working group to add such a classification to the OMB Federal Data Standards on Race and Ethnicity, the standards have not been updated. And, although it was recommended in the 2015 National Content Test: Race and Ethnicity Report Analysis that a separate Middle Eastern or North African classification be adopted for the 2020 Decennial Census, no Middle Eastern or North African classification was included due to questions about whether the information should be collected as an ethnicity or race category. Given the unsettled nature of how to best collect information about Middle Eastern and North African populations, the Bureau is not including a separate classification for Middle Eastern or North African at this point in time. The Bureau notes, however, that OMB is currently in the process of reviewing and revising the standards for collecting data on race and ethnicity for the Federal government and may revise the standards by the summer of 2024. The Bureau will be reviewing OMB's efforts and other developments that may arise in the area of ethnicity and race data collection and measurement.

The Bureau is not committing at this time to updating the rule's ethnicity and race aggregate categories and disaggregated subcategories to align with future changes to OMB Federal Data Standards on Race and Ethnicity. First, the data points the Bureau is finalizing under § 1002.107(a)(18) and (19), regarding minority-owned business status and the ethnicity and race of principal owners, are statutorily mandated. Second, the Bureau notes that the OMB Federal Data Standards on Race and Ethnicity establish only minimum standards for the collection of race and ethnicity information, which the data collection under Regulation C already expands upon. Third, it is unknown what the changes to the Federal standards will be and whether the collection of information based on any revised race and ethnicity aggregate categories and/or disaggregated subcategories would further the purposes of section 1071. The Bureau, however, will track forthcoming developments as to the Federal government's standards for the collection of race and ethnicity information. Regarding updates to data point response options, see final comment 107(a)–4.

As supported by some commenters, the Bureau believes it is important to collect information about principal owners that identify with subgroups within the Black or African American community, particularly as the Black or African American community in the United States diversifies. The Bureau does not believe it is necessary to use the exact same aggregate categories and disaggregated subcategories for ethnicity and race as are used for data collection under Regulation C (which would preclude the Black or African American race disaggregated subcategories), as suggested by some commenters. Certainly, the Bureau's experience with ethnicity and race data collection under HMDA informed the Bureau's considerations for its proposals and for this final rule. However, although the collection of ethnicity, race, and sex data in both contexts serves related fair lending purposes, Regulation C and this final rule are authorized under different statutes and for different markets. The Bureau believes that the added Black or African American race disaggregated subcategories it proposed and is finalizing will provide additional information that will further the purposes of section 1071, as explained below.

According to a Pew Research Center report, while 4.6 million, or one in ten, Black individuals in the United States were born in a different country in 2019, it is projected that by 2060 the number will increase to 9.5 million, or more than double the current level. Within this changing demographic, there are socio-economic differences between Black immigrant-headed households and other immigrant households in the United States, between Black immigrant-headed households and U.S.-born Black American headed- households, and among Black immigrant-headed households by region of origin. For example, the report found that in 2019, poverty rates within the Black immigrant population vary by region, with fewer than one-in-five African-born (16 percent) and Central American- or Mexican-born Black immigrants (16 percent) living below the poverty line, and 11 percent and 12 percent of Caribbean- and South American-born Black immigrants, respectively. The Bureau is not collecting immigrant status as part of the section 1071 data collection. However, this research indicates to the Bureau that there could be important distinctions between subgroups of the Black or African American communities in the small business lending marketplace. The Bureau believes that the collection of information about small businesses whose principal owners identify among the Black or African American subgroups will allow it and others to better understand if there are distinct differences in patterns in lending to small businesses with owners in these subgroups and help fulfill the fair lending enforcement and business and community development purposes of section 1071.

Based on its experience with Regulation C, the Bureau believes that after some initial burden to implement the ethnicity and race reporting requirements, there should be minimal ongoing burden for financial institutions related to the collection and reporting of applicants' self-provided responses regarding their principal owners' aggregate category and disaggregated subcategory ethnicity and race selections. However, the Bureau acknowledges the concern raised by one commenter that, unlike in mortgage transactions where generally there are only up to two applicants, under the Bureau's proposal, ethnicity and race information could be collected for up to four principal owners. The commenter generally noted that because of this potential for an applicant to have up to four principal owners, for applications taken over the phone, it could be frustrating for applicants and financial institution employees and officers to read all of the ethnicity and race aggregate categories and disaggregated subcategories out loud, as is currently the practice under Regulation C. In consideration of this issue, the Bureau has added a comment to provide clarification for collecting ethnicity and race information orally, such as over the phone. Final comment 107(a)(19)–16 generally clarifies that when collecting ethnicity and race information orally, the financial institution is not required to read aloud every disaggregated ethnicity and race subcategory. Instead, a financial institution will be able to orally present the lists of aggregate ethnicity and race categories, followed by the disaggregated subcategories (if any) associated with the specific aggregate ethnicity or race categories selected or requested to be heard by the applicant. Comment 107(a)(19)–16 will also clarify, among other things, that after the applicant has made its selection(s) (if any), the financial institution must also ask if the applicant wishes to hear any other lists of disaggregated subcategories. The comment also provides that the financial institution may not present the applicant with the option to decline to provide ethnicity or race information without also presenting the applicant with the specified ethnicity or race aggregate categories and disaggregated subcategories. Comment 107(a)(19)–16 also generally provides that if an applicant has more than one principal owner, a financial institution will have the flexibility to ask for the principal owners' ethnicity and race information in a way that reduces repetition.

With regard to one commenter's request that the Bureau ensure that an applicant's selection of a disaggregated ethnicity or race subcategory does not prevent the application from being associated with the corresponding aggregate ethnicity or race category, the Bureau does not anticipate that the commenter's concern will be an issue for the 1071 data collection. The Bureau also notes that the commenter's issue is not present for reporting under Regulation C, as stated by the commenter. When reporting an applicant's disaggregated ethnicity or race subcategory selections under Regulation C, the aggregate ethnicity or race category is disclosed in the derived aggregate ethnicity or race field in the publicly released data. To the extent the commenter is referring to a concern about how an applicant may select a disaggregated ethnicity or race subcategory, without also selecting the associated aggregate category, the Bureau believes that allowing applicants to make such a selection and requiring a financial institution to report that selection as it was made, and recognizes that individuals may have varying racial and ethnic identities.

To further this goal, final comment 107(a)(19)–1 states that financial institutions report responses as provided by applicants. Generally, this is the case even if they contain obvious discrepancies and inaccuracies. Upon further review, however, the Bureau has revised the commentary for final § 1002.107(a)(19) to clarify that if an applicant provides additional ethnicity or race information in a write-in field on a paper or electronic data collection form but does not select ( e.g., by a check mark on a paper form) the corresponding “Other” disaggregated subcategory ( e.g., “Other Hispanic or Latino,” “Other Asian,” “Other Black or African American,” and “Other Pacific Islander”), the financial institution is permitted, but not required, to report the corresponding “Other” ethnicity or race disaggregated subcategory as well. Similarly, if an applicant provides the name of an enrolled or principal tribe but does not also indicate that the principal owner is American Indian or Alaska Native on a paper or electronic data collection form, the financial institution is permitted, but not required, to report American Indian or Alaska Native as well. This change aligns with the similar instruction regarding such situations in Regulation C.

The Bureau has also made changes to the commentary specifically regarding the collection of ethnicity and race information to incorporate unique content from the instructions for collecting ethnicity and race information in proposed appendix G, which the Bureau is removing from the final rule, as explained earlier in this section-by-section analysis. These changes include updated numbering, added references to the sample data collection form at final appendix E, and further clarification regarding applicability of the instructions when ethnicity and race information is requested on a paper or electronic data collection form, versus orally ( e.g., telephone applications). The Bureau has also removed proposed clarification in each of the ethnicity and race-related comments regarding ethnicity and race information that an applicant has specifically indicated it is declining to provide, which it did not provide, or which is not applicable, including because the applicant has fewer than four principal owners. The Bureau has either deleted such content where duplicative of similar content in final comment 107(a)(19)–1 (“General”) or moved it to new, generally applicable comments at final comments 107(a)(19)–6 (“Ethnicity, race, or sex of principal owners not provided by applicant”), 107(a)(19)–7 (“Applicant declines to provide information about a principal owner's ethnicity, race, or sex”), and 107(a)(19)–10 (“Reporting for fewer than four principal owners”).

Proposed Rule—Collecting Sex

Proposed comment 107(a)(20)–8 would have clarified that a financial institution is required to permit an applicant to provide a principal owner's sex using one or more of the following categories: Male, Female, the applicant prefers to self-describe their sex (with the ability of the applicant to write in or otherwise provide additional information), and also would have permitted the applicant to refuse to provide the information. The sex categories would have also been on the sample data collection form proposed as appendix E, in response to a query about the principal owner's “Sex,” with a direction to “Check one or more.” Instruction 6 of proposed appendix G would have similarly required financial institutions to permit applicants to use the sex categories as listed on proposed appendix E as responses for a principal owner's sex.

In the NPRM, the Bureau stated that it was generally proposing that financial institutions use the sex categories from Regulation C when requesting that applicants provide the sex information of their principal owners, but that it was also proposing the self-describe response option. The Bureau explained that Federal, State, and local government agencies have been moving to providing additional options for designating sex. At the Federal level, the Bureau noted that, for example, the Department of State had announced that it was planning to offer the option of a new gender marker for non-binary, intersex, and gender non-conforming persons for passports and Consular Reports of Birth Abroad as an alternative to male or female. The Bureau also noted that the Food and Drug Administration includes the gender options of female, male, intersex, transgender, and “prefer not to disclose” on certain patient forms. The Bureau also discussed how 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.

The Bureau further explained that the Supreme Court's 2020 opinion in Bostock v. Clayton County had concluded that sex discrimination encompasses sexual orientation discrimination and gender identity discrimination, and that these forms of discrimination necessarily involve consideration of sex. The Supreme Court reached this conclusion in the context of title VII of the Civil Rights Act of 1964, as amended, which prohibits sex discrimination in employment. Following the issuance of the Supreme Court's opinion, 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. The Bureau noted that other Federal agencies have similarly clarified that other statutes that protect against discrimination based on sex protect against discrimination based on sexual orientation and gender identity.

The Bureau additionally explained that some other Federal agencies had 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. The Bureau cited the example of the Census Bureau's Household Pulse Survey, which asks questions about sex assigned at birth, current gender identity, and sexual orientation. The Bureau also noted that other Federal agencies and initiatives have encouraged sexual orientation and gender identity data collection in health care settings.

The Bureau explained that in light of feedback it received during the SBREFA process, among other matters, the Bureau was proposing to add the 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 in addition to the options currently used on the HMDA sample data collection form.

Proposed comment 107(a)(20)–8 would have explained that a financial institution would have been required to permit an applicant 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 have further explained that, if an applicant indicated that a principal owner preferred to self-describe their sex, the financial institution would have been required to permit the applicant to provide additional information about the principal owner's sex. The financial institution would have been required to report to the Bureau the additional information provided by the applicant as free-form text.

Proposed comment 107(a)(20)–8 would have stated that a financial institution would be required to permit an applicant to select as many categories as the applicant chooses and that the financial institution would report the category or categories selected by the applicant, including any additional information provided by the applicant, or would report that the applicant refused to provide the information or failed to respond. It would have clarified that a financial institution would not have been 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 have explained how a financial institution would report sex if an applicant had fewer than four principal owners, would have provided an example, and would have directed financial institutions to proposed appendix G for additional information on collecting and reporting a principal owner's sex.

The Bureau sought 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 sought comment on whether the sample data collection form should list examples from which the applicant could choose. The Bureau also sought comment on whether, alternatively, sex should be collected solely via the “I prefer to self-describe” option (with the ability of an applicant to write in or otherwise provide additional information). The Bureau also sought comment on whether applicants should be restricted from designating more than one category for a principal owner's sex.

The Bureau also sought 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. The Bureau also sought 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 proposed to collect minority-owned business status and women-owned business status under proposed § 1002.107(a)(18) and (19). The Bureau also sought 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.

Finally, the Bureau also requested information on Federal, State, and local government initiatives, as well as private sector initiatives, involving questions regarding sexual orientation and gender identity in demographic information.

Comments Received—Collecting Sex

The Bureau received comments from community groups, banks, trade associations, and individuals on its proposal for collecting information about principal owners' sex. Commenters addressed both general issues as well as specific aspects of the proposal, including whether to collect sexual orientation and gender identity data.

General comments. A couple of commenters opposed collecting information about principal owners' sex. An individual commenter stated that it does not make sense to collect such information because society's view of gender is still evolving. A lender suggested removing the sex of principal owners (along with several other data points) to reduce the amount of detail in the rule.

One industry commenter supported the collection of sex data as proposed; others supported the Bureau's proposal but suggested that the Bureau use the term “gender” instead of “sex” to be consistent with modern usage. One suggested that the Bureau also include sex category options for transgender and nonbinary.

Another commenter said that sharing information about principal owners' gender identity and sexual orientation should be voluntary for applicants, noting that individuals that are a part of the lesbian, gay, bisexual, transgender, queer, intersex, and asexual (LGBTQIA) community are concerned about harassment and should be protected.

Collection of sexual orientation and gender identity information. Most of the comments received by the Bureau in response to its proposal for collecting information about a principal owner's sex were in the context of whether the Bureau should also collect information about principal owners' sexual orientation and gender identity.

Several banks, trade associations, and individual commenters opposed adding inquiries about principal owners' sexual orientation and gender identity to the final rule. A few stated that bank employees would feel uncomfortable requesting this information; that applicants would refuse to provide the information or would be offended by the questions; or that separate questions for sex, sexual orientation, and gender identity would be invasive.

A few of these commenters stated that requiring financial institutions to ask separate questions for sex, sexual orientation, and gender identity could potentially further segregate and stigmatize LGBTQ individuals and their businesses, when members of that community already face bias and discrimination. These commenters also raised concerns about the security of the collected information, noting that storing it with financial institutions and in a nationwide database exposes the information to not only a number of persons with authorized access but also potentially to hackers. These commenters stated that although there is some protection from employment discrimination under Federal law due to Bostock, there are States where discrimination against LGBTQ individuals in other forms is legal and inferences about one's sexuality could have serious negative impacts. The commenters also expressed concern that the information could be used for other purposes, with one commenter additionally expressing a concern that such previously collected data could be used for unintended purposes. Another commenter stated that the information should be requested only if information is also provided to applicants to allow them to make informed decisions about providing the information, which includes a warning that discrimination based on sexual orientation may be allowed in certain States. Some commenters also opposed collecting information on principal owners' gender identity and sexual orientation, on the grounds that such information is not needed by financial institutions to make loans and it should have no bearing on an applicant's ability to qualify for a loan.

Several other industry commenters expressed concern that adding more inquiries to a demographic data collection form would add complexity to the collection process and increase the burden on financial institutions. One urged the Bureau to not include inquiries about such personal information in the business lending process without more stakeholder input as to the benefits and burdens of collecting the data and before publishing such sensitive information. These commenters also suggested that the Bureau give financial institutions the option of collecting the information.

Some commenters suggested that the Bureau should include only “Male” and “Female” categories as responses to a request for a principal owner's sex information. One bank opposed the inclusion of options for gender choices and free-form text, stating that there are many possible gender categories and including those categories or a write-in field could dilute the data and lead to inconclusive findings. Several lenders also specifically urged use of only “Male” and “Female” categories as answer options in the final rule, for alignment with sex categories used to collect HMDA data, on the grounds that it would avoid confusion among financial institutions and applicants, promote efficient implementation and reporting, reduce administrative complexity, and facilitate compliance. One bank expressed concern about use of the proposed self-describe sex response option for applications reported under both HMDA and section 1071.

In contrast, a range of commenters, including many community groups, research and advocacy groups, community-oriented lenders, and individual commenters, urged the Bureau to require the collection of more detailed and accurate information about gender identity and sexual orientation than would be collected under the Bureau's proposal. These commenters generally stated that more detailed information is necessary to account for small businesses owned by people with intersectional identities and orientations, to see if they experience discrimination, enforce fair lending laws, and to allow policymakers and the public to have a better understanding of and address gaps and community needs. Several commenters asserted that to the final rule should reflect that gender is not binary and be more inclusive. Others argued that collecting principal owners' gender identity information will enhance the Bureau's and the public's ability to enforce ECOA for transgender individuals and gender minorities and collecting their sexual orientation information will likewise facilitate the same as to lesbians, gays, bisexuals, and other sexual minorities, consistent with the purposes of section 1071. Another commenter stated that collecting information about gender identity and sexual orientation would reduce the burden of implementing future legislation requiring such collection. Another commenter said that collecting data on gender identity and sexual orientation would allow lenders, especially CDFIs, to be more accountable to their mission of economic justice and financial inclusion. Some commenters urged the Bureau to follow best practices and directed the Bureau to resources made available and research conducted by the Williams Institute at the University of California Los Angeles School of Law.

A number of these commenters urged the Bureau to not conflate lines of inquiry for gender identity and sexual orientation, with some specifically suggesting separate sets of questions, either in addition to or in place of, the inquiry about principal owners' sex as proposed by the Bureau.

One commenter stated that respondents are unlikely to consider sexual orientation and gender identity to be sensitive and would likely provide their information, citing a study as to the collection of such information in health centers and another relating to attitudes of sexual minorities responding to a 2020 survey administered by the Census Bureau. Commenters also noted that other Federal surveys ask questions about gender identity and sexual orientation, including the Census Bureau and the Centers for Disease Control and Prevention, and that questions to identify transgender respondents are included on State and investigator-led surveys. One commenter asserted that the proposal collects less information than other Federal agencies, citing the example of the Census Bureau.

Commenters also noted that the Federal government has long considered what best practices should apply for the measurement of sexual orientation and gender identity information, such as through the Federal Interagency Working Group on Improving Measurement of Sexual Orientation and Gender Identity in Federal Surveys, and by commissioning a study looking at the measurement of sex, gender identity, and sexual orientation through the National Academies of Sciences, Engineering, and Medicine (the National Academies).

Legal authority. Several research and advocacy organizations argued that the Bureau has the legal authority to collect information about the gender identity and sexual orientation of principal owners. Generally, these commenters stated that ECOA and section 1071 provide the Bureau with a broad grant of authority to issue regulations requiring the collection of gender identity and sexual orientation data. The commenters also highlighted that unlawful discrimination based on “sex” under ECOA includes discrimination based on sexual orientation and gender identity, consistent with the U.S. Supreme Court's decision in Bostock. As a result, they said, collecting sexual orientation and gender identity data would facilitate the purposes of section 1071 by enhancing the agency's ability to understand small business lending discrimination based on sexual orientation and gender identity, enforce fair lending laws, and identify business and community development needs and opportunities of small businesses.

However, several industry commenters argued that the collection of sexual orientation and gender identity information is not clearly required. One stated that there is no indication in the statute that Congress intended the term “sex” as used in section 1071 to encompass sexual orientation and/or gender identity. Another emphasized that the statute focuses on the collection and reporting of data about the defined term “women-owned businesses,” and asserted it is thus not apparent that the section 1071 data collection is meant to include such data. Another commenter argued that neither Congress nor the Supreme Court in Bostock has taken specific action to change the scope of the prohibition against sex discrimination in ECOA to include discrimination on the bases of sexual orientation and gender identity.

Need for information on gender identity and sexual orientation. Some community groups and research and advocacy organizations generally stated that data are needed to understand LGBTQI+ individuals' and business owners' experiences in accessing small business credit. Some emphasized that available Federal small business or fair lending data do not currently include sexual orientation and gender identity information. One commenter noted that the Federal data that exist on LGBTQ individuals' access to credit are generally limited to the population of cohabitating same-sex couples because such data are often collected through a marital status question on Census Bureau surveys.

Nevertheless, these commenters stated that available research suggests that sexual and gender minorities encounter discrimination when attempting to access credit. The commenters cited research, based on the 2019 Federal Reserve Board Survey of Household Economic Decisionmaking, finding that LGBT individuals (and particularly LGBT persons of color and depending on gender) are more likely to have their applications for credit rejected and that they are more likely to be approved for less credit than they wanted. The commenters stated that studies based on HMDA data have also found that same-sex couples are denied home loans more often and that the loans they do receive have higher interest rates and fees than different-sex couples of similar financial and credit quality. Similarly, loans made in neighborhoods with a higher density of LGBTQI+ individuals generally have higher interest rates and fees than neighborhoods with a lower density. One commenter stated that the analysis likely understates these disparities due to HMDA data limitations. A research and policy organization focusing on gender identity and sexual orientation issues also cited reports and analyses highlighting disparities in home ownership between LGBT adults and non-LGBT adults, same-sex couples and different-sex couples, and among sexual minorities versus heterosexual individuals and also suggesting that home ownership among transgender adults is particularly low. This commenter also stated that such research noting disparities among LGBTQI+ persons based upon race, sex, and sexual orientation suggests that the data collected under section 1071 should allow identification of individuals who may have intersectional identities.

Commenters also noted that LGBTQI+ individuals and businesses are key parts of the population and economy in this country, yet face discrimination and disparities in a number of areas. They stated that there are an estimated 11 million LGBT adults, which make up around 4.5 percent of the total U.S. adult population. They stated that high numbers of LGBTQ adults have self-reported experiences with physical and verbal abuse and violence, job loss, and workplace harassment and discrimination. They also noted that prior to the COVID–19 pandemic, LGBTQ individuals were more likely to report having experienced economic hardship, from unemployment, homelessness, and in other areas. The commenters also emphasized that studies show that during the pandemic, LGBTQ adults, and particularly LGBTQ people of color and gender minorities, have disproportionately experienced the negative financial effects of the COVID–19 pandemic, including food insecurity, job loss, and housing insecurity. One commenter also highlighted that research shows that transgender individuals are disadvantaged as compared to their cisgendered counterparts across a number of socio-economic factors, such as education levels and percentages living at or below the poverty level, among others.

One commenter cited a study estimating that about 7.7 million LGBT adults live in States without explicit statutory protections against discrimination on the basis of sexual orientation and gender identity in credit. This commenter also noted research finding that while 30 States have laws analogous to ECOA, only about half explicitly prohibit discrimination on the basis of sexual orientation or gender identity, leaving a significant number of LGBT adults in the United States without protection from credit discrimination under State law. Further, this commenter stated that LGBTQ businesses may generally have a particular need for credit, because they often lack the family support other small business entrepreneurs may rely upon to begin their businesses.

Suggestions for collecting sexual orientation and gender identity information. A number of commenters suggested specific modifications to the Bureau's proposal, generally by either adding response categories to the proposed (single) inquiry about a principal owner's sex; by recommending two separate inquiries for the identification of a principal owner's gender (as opposed to sex) and sexual orientation; or by suggesting separate inquiries as to each of a principal owner's sex, gender identity, and sexual orientation.

Generally, commenters who suggested additional response categories suggested adding such options in the context of a single inquiry for information about a principal owner's sex. Some commenters suggesting adding an additional category, such as “Other,” to allow the Bureau to analyze whether nonbinary individuals face discrimination from lenders and urged the Bureau to avoid a data collection that forces applicants to provide their principal owners' information on a strict binary sex/gender basis. Several industry commenters suggested the Bureau remove the self-describe option with a write-in text field with a third category, such as “non-binary.” These commenters expressed concern that the write-in text field may create data integrity problems or add complexity to reporting standards.

Other commenters suggested specific sex categories for the Bureau's consideration. A group of trade associations suggested adding sex categories for transgender and nonbinary. A community group suggested adding a “non-binary” sex category and any others according to best practices, in order to bring transparency as to the treatment of that population. Another suggested adding “Non-binary,” “Transgender Male,” “Transgender Female,” stating that these categories are widely accepted by the LGBTQ community, will provide more data, and will be more inclusive. This commenter also supported allowing applicants to select one or more options. A CDFI lender recommended that the Bureau include a list of examples that an applicant could refer to when self-describing, like intersex, non-binary, or transgender. This commenter stated that providing examples for the self-describe option would streamline the data collection and analysis.

A bank suggested that instead of requesting information from applicants about their principal owners' sex, that the Bureau identify a principal owners' information based on what is listed on the principal owner's driver's license. The bank noted that some states, like New York, allow residents who identify as nonbinary or intersex to use an “X” marker on their State driver's licenses and stated that beneficial owners' driver's licenses must be provided as a result of FinCEN's customer due diligence rule when an account is opened. The bank acknowledged that different states may not allow the use of an “X” marker and that some principal owners may not identify with the gender marker on their driver's license but suggested that aligning the data collection with this supporting documentation would remove the potential for error and regulatory scrutiny.

Some commenters urged the Bureau to revise its proposal to include two sets of inquiries, one addressing gender identity and the other sexual orientation, each with multiple categories from which an applicant could select. One community group suggested two separate inquiries are necessary, to accurately measure disparities and discrimination. The community group suggested that for the inquiry about gender identity, response options could include “Male,” “Female,” “Transgender,” and “Do not identify as female, male, or transgender.” For the inquiry about sexual orientation, the community group stated response options could include “Straight,” “Gay or lesbian,” “Bisexual,” and “Transsexual, or gender non-conforming.” This commenter also suggested the Bureau consult experts on these issues. Some other community groups suggested that, to reflect current language around gender-identity and expression, categories for gender should include “Cis woman,” “Cis man,” “Trans woman,” “Trans man,” “Non-binary or gender non-conforming,” and “Other” (with a write-in text field). For sexual orientation, the commenters suggested “Straight/heterosexual,” “Bisexual,” “Queer,” and “Other” (with a write-in text field). One commenter noted that the answer options for each inquiry should include those to allow the applicant to choose not to state its response and an “Other” option (with a write-in text field).

Several research and policy organizations focusing on gender identity and sexual orientation issues generally stated that because sex, sexual orientation, and gender identity are related but intellectually distinct concepts, the Bureau should collect such information through three separate inquiries addressing each concept instead of through one question asking about a principal owner's sex. A community group stated that the Bureau's proposal does not sufficiently encompass gender, gender identity, and sexual orientation to address fair lending concerns.

Research and policy organizations also suggested the Bureau take an approach similar to that used in the Census Bureau's Household Pulse Survey, which they characterized as taking a “two-step” approach to asking about a respondent's sex, with one question about the respondent's sex assigned at birth and a second question about their current gender. They also recommended the Household Pulse Survey approach in asking a separate question about sexual orientation, which the commenters noted aligns with a recommendation from a 2009 Sexual Minority Assessment Research Team report on best practices for asking questions about sexual orientation on surveys. One also urged the Bureau to examine a two-step approach to sex for the final rule, noting that it was based on research and recommended by a panel of experts known as the Gender Identity in U.S. Surveillance group, through the Williams Institute at the University of California Los Angeles School of Law, as one that is likely to have high sensitivity and specificity in distinguishing transgender and gender minority respondents from cisgender respondents. The commenter also recommended that the Bureau consider if any refinements are necessary in the context of section 1071, conduct user testing, and also coordinate in the future with other Federal agencies to improve its measurements of principal owners' sex.

For the question about sexual orientation, research and policy organizations recommended using the same or similar questions as presented in the Census Bureau's Household Pulse Survey and the 2009 Sexual Minority Assessment Research Team report. A community group also suggested that the Bureau adopt the Census Bureau's approach with the Household Pulse Survey, but stated that more response categories may be necessary to better capture the LGBTQIA+ community.

Selection of multiple responses. The Bureau received several responses to the Bureau's question about whether applicants should be restricted from designating more than one category for a principal owner's sex. Two commenters supported the Bureau's proposal to allow an applicant to select multiple sex categories, stating that limiting applicants to one answer option may be viewed as marginalizing the principal owner's personal characteristics for individuals whose gender is fluid. Another suggested allowing the selection of just one response category, which it said would streamline data collection. Two research and policy organizations suggested that the Bureau limit applicants from selecting more than one response to the inquiry about sex assigned at birth because medical records in the United States generally allow only male or female sex assignments. They also suggested that the Bureau allow just one selection in response to a question about sexual orientation. But for gender identity, the applicant suggested allowing applicants to select multiple response options.

Self-describe response option. Several commenters supported the Bureau's proposed “I prefer to self-describe” option (with the ability to write in or otherwise provide additional information). A business advocacy group stated that the information collected from the option will bring attention to inequitable lending practices based on gender identity. As noted above, one commenter supported the proposed answer option, but suggested that the Bureau include a list of examples. The commenter opposed, however, the use of the option as the only way to collect information about principal owners' sex. Another commenter supported having the “I prefer to self-describe” option as the only way used to collect sex information, stating that this approach would promote diversity and acceptance and that the Bureau's proposal may make applicants feel uncomfortable expressing their true gender identity.

However, several industry and research and policy organization commenters opposed the proposed “I prefer to self-describe” option. One commenter said it would be confusing for applicants and bank employees, and recommended having the Bureau's data collection for principal owners' sex match that under Regulation C. Other commenters generally cited data quality concerns related to potential write-in field responses. Two such commenters noted that in the HMDA free-form ethnicity and race data, they commonly see responses that would fit into an existing category and expressed concern that similar issues would arise under the Bureau's proposal. Two industry commenters also noted that the write-in field could diminish the accuracy and utility of collected data, because fewer responses would be reported for other listed categories. One industry commenter also noted that a write-in field may add complexity to reporting standards. Another stated that the Bureau may encounter varying spellings and misspellings, which would create reporting burdens and diminish the accuracy of the information received by the Bureau.

A research and policy organization stated that because the Bureau will not be including write-in responses in what is released to or analyzed for the public, write-in responses allowing applicants to self-describe their principal owners' sex, sexual orientation, or gender identity would prevent respondents from being included in the data for analysis. The commenter suggested that the Bureau assess the performance of questions as to gender identity and sexual orientation first and then make revisions as needed. The commenter also stated that it also did not recommend including the proposed “I prefer to self-describe” option as a way to capture individuals with intersex traits, and noted that it is not generally recommended that researchers capture information on intersex status through a question on sex.

Other research and policy organizations stated a concern that free-form text responses would require substantial effort by the Bureau and others to distinguish transgender individuals and gender minorities from respondents using the “I prefer to self-describe” option, even though female or male responses would have been appropriate. This commenter noted that analysis of free-form text fields can be time-intensive and responses challenging to categorize, leading to discarded data, reduced sample sizes, lessened statistical power, and potentially errors in classification. The commenter also noted that although a write-in response for gender identity to capture the many gender identities and communities that exist may work in some circumstances, it does not recommend it for a data collection of the anticipated size and complexity of the effort under section 1071. With regard to sexual orientation, the commenter noted that most people with same-sex attraction are likely to choose the terms gay, lesbian, or bisexual if they are the only terms provided, and thus a self-describe option would just reduce the number of identifiably lesbian, gay, and bisexual principal owners in the section 1071 data collection and reduce the usefulness of the data.

Intersex status. Research and policy organizations suggested that the Bureau add a specific inquiry regarding variations of sex characteristics in the final rule or in the future, to identify intersex business owners and their experiences. They emphasized that people with variations in sex characteristics may comprise as much as 1.7 percent of the population. And, although little population-based data exists, according to the commenter, intersex people face documented social and health disparities. This in turn, they said, could affect their economic opportunities. Moreover, according to the commenter, the increased visibility of intersex individuals could also make small business owners with intersex traits more vulnerable to discrimination. They also stated that the Department of Justice's Title IX Legal Manual rationale—finding that title IX's prohibition on sex discrimination includes discrimination based on sex characteristics, including intersex traits—should also apply to ECOA. They noted that a consensus study from the National Academies had recommended that the Federal government develop and evaluate measures to identify intersex populations and recommended that the Bureau review another pending National Academies study with recommendations on this area.

Final Rule—Collecting Sex

For the reasons set forth herein, the Bureau has revised its proposal regarding the collection of information about the sex of the principal owners of a small business applicant. Under final comment 107(a)(19)–15, if collecting the information using a paper or electronic form, the financial institution must make the request using the term “sex/gender” and must permit applicants to respond by using free-form text. If collecting the information orally, the financial institution must inform the applicant of the opportunity to provide each principal owner's sex/gender and record the response. As with other protected demographic information, the applicant can refuse to provide the requested information. Unlike the Bureau's proposal, the final rule does not use specific sex categories, such as “Male” and “Female,” for a principal owner's sex/gender. The Bureau has made conforming changes, removed duplicative content, and updated cross-references, in comment 107(a)(19)–15 and other comments that relate to collection of principal owners' sex.

As an initial matter, the Bureau believes that collecting information about a principal owner's sex, gender identity, and sexual orientation is within section 1071's mandate. Following the Supreme Court's holding in Bostock, even though the term “sex” is not defined in ECOA or in Regulation B, the Bureau interprets ECOA's and Regulation B's prohibitions against discrimination on the basis of “sex” to include discrimination based on sexual orientation and gender identity. As stated by the Court, sex discrimination encompasses sexual orientation discrimination and gender identity discrimination, as those forms of discrimination necessarily involve consideration of sex. Because section 1071 is an enumerated provision of ECOA and the final rule is part of Regulation B, this interpretation as to what is included within the scope of the term “sex” necessarily applies to the collection of information about a principal owner's “sex” under section 1071 as well.

The Bureau believes further that available research, including that cited by commenters and discussed above, showing disparities in access to credit across gender identity and sexual orientation supports the importance of collecting gender identity and sexual orientation small business lending data.

There was no clear consensus among commenters as to how information about the sex of small businesses' principal owners should be collected. As described above, the Bureau received a diverse array of comments recommending a range of response options to the proposed inquiry about a principal owner's sex and suggesting questions in addition to, or instead of, the Bureau's proposed query about a principal owner's sex. The Bureau notes that at the Federal level, there is wide variance in data collection approaches, question phrasing, and answer options, and that the Federal government's approach is in flux. For example, on January 11, 2023, shortly before this rule was issued, OMB released new recommendations for agencies on the best practices for the collection of sexual orientation, gender identity, and sex characteristics data on Federal statistical surveys, including strategies to preserve data privacy and safety. The Bureau also notes the consensus study from the National Academies cited by a commenter that indicates that the terms used to describe individuals who identify as or exhibit attractions and behaviors that do not align with heterosexual or traditional male-female binary gender norms are evolving.

As a result of these factors, the Bureau believes that an approach that allows principal owners to designate their sex/gender with the ability to write-in or provide additional information (such as in a free-form field on a paper or electronic form) will encourage applicant self-identification using terminology that may change over time. To increase applicants' autonomy to provide responses they feel best characterize their principal owners, the final rule does not include additional sex category responses suggested by commenters nor does it require a financial institution to provide a list of example responses when requesting that an applicant provide its principal owners' sex. This approach mitigates the concern of some commenters that a list of disaggregated categories would be difficult for some lender staff to ask and for some applicants to be asked.

In partial response to the several commenters who urged that the Bureau use the term “gender” instead of “sex,” the Bureau is requiring financial institutions to use the term “sex/gender” when requesting information about principal owners' sex. As explained above, the Bureau interprets ECOA's and Regulation B's prohibitions against discrimination on the basis of “sex” to also include, inter alia, discrimination based on gender identity; this interpretation as to what is included within the scope of the term “sex” necessarily also applies to the collection of information about a principal owner's “sex” under section 1071. The Bureau believes that requiring financial institutions to ask for information about “sex/gender” will provide principal owners with the flexibility and autonomy to use terms that they prefer.

Although some commenters requested that the Bureau require the collection of principal owners' sexual orientation information and intersex status in addition to the collection of information about their gender identity, the final rule does not include these specific inquiries. The Bureau believes that such specific inquiries about individuals would likely be perceived as more invasive than a general request as to “sex/gender” and, as explained above, the overall LGBTQI+-ownership status of the business. Accordingly, the Bureau is concerned that questions to this effect could impact the overall willingness of applicants to provide demographic information, as noted by some commenters.

Some commenters expressed concerns that collecting data via write-in text fields may lead to data analysis issues. The Bureau anticipates that its review of responses to the sex/gender inquiry will result in data that could be used by the Bureau and other regulators and, once grouped into categories, publicly released subject to any necessary modifications or deletions for privacy purposes.

The Bureau believes that principal owners' sex/gender and applicants' LGBTQI+-owned business status data points together strike a balance that respects for small business owners' autonomy in self-identification, while also providing the Bureau and the public with information needed to further section 1071's statutory purposes.

The Bureau recognizes that the way financial institutions will collect data about sex under the final rule differs from the collection of information about the sex of home mortgage applicants under Regulation C/HMDA. Although the collection of ethnicity, race, and sex data in both contexts serves related fair lending purposes, the two regulations have different legal authorities, cover different markets, and were developed at different times. The Bureau has specifically tailored the collection of sex data under this final rule implementing section 1071 for the small business lending context, in consideration of the comments received and of continuing developments in Federal government's approach to collecting information about sex, gender identity, and sexual orientation.

The Bureau has also considered commenters' statements that small business applicants may feel uncomfortable and have privacy concerns about providing sensitive information to lenders related to the sex of their principal owners. As discussed in greater detail in part VIII below, after receiving a full year of reported data, the Bureau will assess privacy risks associated with this data and on that basis, make appropriate pre-publication modification and deletion decisions. The Bureau takes the privacy of such information seriously and intends to make appropriate modifications and deletions.

Commenters also included suggestions for whether to allow applicants to select only one or multiple response categories in response to questions related to a principal owner's sex. As explained above, the Bureau has decided to include only a self-describe response option in response to the question about a principal owner's sex/gender at this time, rendering these comments moot.

One commenter stated that providing information about a principal owner's sexual orientation and gender identity should be optional for the applicant. The Bureau agrees, and applicants have a right to refuse to provide responses to questions about protected demographic information. As explained in final comment 107(a)(19)–1, financial institutions must permit an applicant to refuse to answer the financial institution's inquiry and must inform the applicant that it is not required to provide the information.

With regard to some commenters' suggestion that questions about a principal owner's gender identity and sexual orientation should be optional for financial institutions, the Bureau is not requiring separate questions for sex, gender identity, and sexual orientation for the reasons above. Thus, these commenters' suggestion is moot.

The Bureau does not believe it would be appropriate, however, to remove the requirement to collect principal owners' sex, suggested by some commenters. As discussed above, the collection of information about sex is required under section 1071.

The Bureau is not requiring financial institutions to report what sex or gender is indicated on a principal owner's State driver's license, as requested by one commenter. As the commenter acknowledged, State requirements differ as to what residents may select as to their sex and/or gender on their State government-issued identification and the available selections may not be adequate as to a principal owner's self- identified sex and/or gender. As noted above, the Bureau believes that the collection of principal owners' sex information under this rule should be based solely on an applicant's self-identification. However, as the commenter also pointed out, some governmental authorities allow individuals to indicate their sex as “X” in government-issued documents. Nothing in this rule would interfere with a principal owner choosing to designate their sex in that way in the self-describe response option.

With regard to one commenter's statement that the Bureau should not allow the use of previously collected information due to concern about misuse of such data, the final rule specifies how previously collected information may be used, as discussed further in the section-by-section analyses of §§ 1002.107(d) and 1002.110(e) below.

Regarding a commenter's suggestion that the Bureau should consult further with stakeholders before finalizing any publication of information about sexual orientation and gender identity of principal owners, the Bureau intends to engage further with stakeholders before publishing data, as discussed in part VIII below.

Proposed Rule—Collecting Ethnicity and Race via Visual Observation or Surname in Certain Circumstances

The Bureau proposed 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. This would have been required if the financial institution met in person with one or more of the applicant's principal owners and the applicant did 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).

The Bureau noted that demographic response rates in the SBA's Paycheck Protection Program data are much lower when compared to ethnicity, race, and sex response rates in HMDA data. The Bureau reasoned that without a visual observation and/or surname collection requirement, meaningful analysis of principal owner ethnicity and race data could be difficult, significantly undermining section 1071's purposes. Historically, one challenge under HMDA has been the reluctance of some applicants to voluntarily provide requested demographic information, such as ethnicity and race. The Bureau explained that 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 that it believes that the requirement has resulted in more robust response rates in the HMDA data.

Accordingly, the Bureau proposed that financial institutions collect at least one principal owner's ethnicity and race (but not sex) on the basis of visual observation and/or surname in the circumstances described above. Under the Bureau's proposal, a financial institution would not have been required to collect ethnicity and race via visual observation and/or surname if the applicant provided any demographic information regarding any principal owner. For applicants with multiple principal owners, the financial institution may not be able to determine whether the applicant had provided the demographic information of the principal owner who met in person with the financial institution or for another principal owner. The Bureau sought comment on this proposed approach. The Bureau also sought 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 all of the principal owner's requested demographic information, and the financial institution meets in person with the principal owner. The Bureau noted that in this situation, the financial institution would be able to “match” any demographic information that the applicant provides with the correct principal owner because there is only one principal owner.

Proposed comment 107(a)(20)–9 would have explained that a financial institution would be required to report ethnicity and race based on visual observation and/or surname in certain circumstances. It would have further explained that a financial institution would not be 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.

Proposed comment 107(a)(20)–10 would have clarified 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 have also provided examples of situations where the financial institution meets in person with a principal owner and where it does not. The Bureau requested comment on this approach and whether there should be additional or different examples.

Proposed comment 107(a)(20)–11 would have clarified that a financial institution uses only aggregate categories when reporting ethnicity and race based on visual observation and/or surname and would have directed financial institutions to proposed appendix G for additional information on collecting and reporting ethnicity and race based on visual observation and/or surname. The Bureau requested comment on whether to permit, but not require, financial institutions to use the disaggregated subcategories as well when reporting ethnicity and race based on visual observation and/or surname.

In addition to the specific matters identified above, the Bureau sought comment on its proposed approach to this data point, the proposed methods of collecting and reporting the data, and on whether additional clarification regarding any aspect of this data point is needed.

Comments Received—Collecting Ethnicity and Race via Visual Observation or Surname in Certain Circumstances

General comments. The Bureau received comments from many banks, trade associations, community groups, members of Congress, small business owners, service providers, and others on its proposal that financial institutions be required to collect at least one principal owner's ethnicity and race on the basis of visual observation and/or surname under certain circumstances. A community group, a joint letter from community and business advocacy groups, and a CDFI lender supported the proposed requirement, emphasizing that demographic data collection via visual observation and surname analysis has been required by Regulation C for many years. The community group also commented that ethnicity and race information, including information collected via visual observation and/or surname as proposed, will allow data users to assess how the experiences of small businesses differ by approximate amount of minority ownership in the business, particularly when combined with information about an applicant's number of principal owners under proposed § 1002.107(a)(21).

Many commenters objected to the proposed requirement. A number of industry commenters stated that the Bureau should require only the reporting of applicant-provided data. A number of agricultural lenders, a trade association, a service provider, a community group, and a business advocacy group stated that while they support the collection of demographic information and the need for robust data, they do not support the proposed requirement. A few industry commenters said that the Bureau should only require best efforts to collect demographic information.

Use of visual observation and surname to collect sex. A number of commenters, including banks, trade associations, community groups, and LGBTQI+ advocacy groups, supported the Bureau's proposal to not require the use of visual observation and/or surname to report a principal owner's sex. Several LGBTQI+ advocacy groups commented that visual observation of the gender expression of principal owners would inevitably rely upon sex stereotypes and lead to inaccurate determinations of sex, gender identity, or sexual orientation. A community group similarly stated that it would not be possible in some cases to use visual observation to accurately identify gender. Several industry commenters stated that requiring financial institutions to determine the sex of principal owners would make employees uncomfortable and potentially offend applicants who had declined to provide this information.

In contrast, some banks requested that the visual observation and surname requirement for this rule be aligned with Regulation C and thus apply to data on sex as well as for ethnicity and race. These commenters said that alignment with Regulation C would reduce reporting errors and financial institutions' compliance burden because financial institutions would not need to use additional resources to understand and implement different data collection requirements.

Data accuracy and related concerns. Many commenters, including a range of lenders, trade associations, community groups, several members of Congress, business advocacy groups, and others, were concerned that the proposed requirement would yield unreliable ethnicity and race data.

Some commenters argued that such a requirement would introduce error, bias, and subjectivity into the data collection process, leading to inaccurate or distorted data. Several said that such purported bias should not be part of the underwriting process or that section 1071 was intended to combat this type of bias. One commenter said that banks do not consider the ethnicity, race, or gender of small business applicants and argued that they should not be required to guess such information. Other commenters asserted that inaccuracies in the collected data would not support rigorous analysis, would not serve the purposes of section 1071, and would be inconsistent with congressional intent to collect reliable data on small business credit. Several other commenters similarly stated that data collected via visual observation or surname would impair analyses, conclusions, and policies based on such data.

Several commenters asserted that data collected pursuant to the proposed requirement would be inaccurate because the process would be based on or encourage the use of racial stereotypes or assumptions. Several other commenters asserted that ethnicity and race determinations made by visual observation have been prone to error or unreliable, with some citing materials on own-race bias, other-race effect, and similar issues. Some commenters predicted that the proposed requirement may cause some lenders to rely on surname alone to avoid determining ethnicity and race based on visual observation. Others said that the proposed requirement should not be finalized because it could risk perpetuating discrimination and insert racial stereotyping into application processes, posing risks to applicants and financial institutions alike. A community group stated that the proposed data collection method raises fair lending concerns. With respect to reporting ethnicity and race based on surname, several commenters asserted that surname analysis was unreliable and obsolete.

Commenters also identified specific circumstances that they said could lead to inaccurate ethnicity and race determinations based on visual observation and surname. Some commenters argued that the provision does not account for situations such as adoption, surname changes, and multi-ethnic or multi-racial identities. Other commenters alleged that visual observation and surname analysis would likely be inaccurate or unreliable as a result of increasing demographic diversity. Several asserted that racial and ethnic identities are personal, influenced by a number of different factors, and should be confirmed only by the applicant. Another commenter likewise stated that the Bureau should only require lenders to report based on applicant-provided data to promote accuracy and inclusivity. Several commenters noted that a principal owner's ethnicity and race could be reported differently by different lenders under the proposed requirement.

Some commenters said that loan officers and bank employees lack the expertise or training to make ethnicity and race determinations, and that the proposed requirement would lead to guessing. Another commenter said the proposed requirement would create training and other employment hurdles without producing meaningful information.

Several commenters noted that the proposed requirement would result in inaccurate data when the person filling out the application is not a principal owner of the business, but rather an employee. Commenters also asserted that data would be misleading when the ethnicity and race of the principal owner meeting with the bank is not representative of the other principal owners of the business. One commenter asserted that the proposed requirement could subject lenders to liability because they do not always interact with principal owners.

Some commenters opposed the proposed requirement on the grounds that data collected using this method would be, they said, generally unrepresentative of small business applicants. They predicted low response rates to inquiries about ethnicity and race for this rule, based on the experience of the Paycheck Protection Program, and argued that ethnicity and race data would be based on visual observation and surname analysis for a disproportionate number of applications, which these commenters posited would result in inaccurate data. Several commenters stated that, as a result, inaccuracies attributable to the use of visual observation and surname analysis would be magnified, making the data collected unrepresentative of the applicant population and not useful for any analyses. Others commented that ethnicity and race data reported based on visual observation or surname would be both inaccurate and unrepresentative because of the increased use of digital application processes with no visual component. A trade association anticipated low applicant response rates to the demographic questions based on its members' experience that customers express anger or are reluctant to provide ownership information as required by FinCEN's customer due diligence rule. This commenter expected that applicants would not want to provide demographic information due to concerns that it would be used in the credit process, despite any assurances to the contrary on the sample data collection form.

Customer relationships. Many commenters asserted that the proposed requirement would impair customer relationships, citing small business lending as more relationship-dependent than other forms of credit. A number of commenters stated that it would make bank employees and applicants uncomfortable, with some suggesting specifically that this could occur when in-person applicants witness employees filling out demographic information that the applicants declined to provide. A number of commenters likewise said it would negatively impact customer relationships. One argued that because banks are more likely to have ongoing interactions with a small business owner than someone seeking a mortgage, offense taken from visual observation or surname analysis would be more detrimental.

Several agricultural lenders expressed concern that the disclosure on the proposed sample data collection form informing applicants about the obligation of lenders to report ethnicity and race information through visual observation and/or surname analysis would be negatively received by applicants, stating that applicants might perceive the notice as an indication that the lender intends to or must contradict the applicant's wishes. A trade association suggested that applicants would feel uncomfortable providing their demographic information if they receive notice that such information would not be subject to a firewall, which would lead to a greater use of visual observation and surname analyses.

Right to refuse. A range of commenters opposed the proposal on the grounds that applicants have a right to decline to provide demographic information. One commenter said that the proposed requirement would further damage the public's confidence in financial institutions and heighten privacy concerns, because it would contradict an applicant's decision to not provide the requested information. Several cited the high percentage of Paycheck Protection Program loan applicants that did not report demographic data as showing applicant concerns about privacy and the importance of voluntary reporting.

Some commenters stated that the proposal is inconsistent with, or that it inappropriately circumvents, section 1071's provision that an applicant may refuse to provide protected demographic information and urged the Bureau to respect that right. One commenter said that section 1071 is structured to require financial institutions to make inquiries for their customers' information and to allow applicants to refuse to provide such information; given this framework, the commenter questioned whether requiring collection would be permissible under the statute when an applicant has already refused to provide the information. One commenter said that applicants may not understand that if they decline to answer demographic inquiries that lenders will determine and report their ethnicity and race anyway. Several commenters highlighted that HMDA, in contrast to section 1071, does not provide a comparable right of refusal.

Burden and cost. A few commenters objected to the proposed requirement on the grounds that it would impose significant costs on some lenders. One commenter identified costs to create and maintain policies and procedures, apply these consistently, conduct ongoing training, and audit compliance, while another said the proposal would require substantial changes to its loan processes, systems, and compliance protocols to implement. A commenter said that reliance on proxying, inference, or visual observation would impose a number of cost and compliance concerns. Several commenters asserted that lenders may face substantial costs to train employees to make determinations; one said this training could be complex for front-line employees who are currently taught that ECOA and other laws prohibit the collection of ethnicity and race information. A CDFI lender stated that the proposed requirement would impose less burden on larger banks and online lenders, either because they will have a higher number of online loan applications or because they already report demographic information on the basis of visual observation and surname under HMDA.

Response rates. Several commenters disputed that the higher responses rates in HMDA data, compared with lower response rates in Paycheck Protection Program data, could be attributed to HMDA's visual observation and surname requirement, and also disputed that this proposed requirement could improve response rates for financial institutions complying with the small business lending rule. Some suggested that the Bureau's concern with low response rates based on the Paycheck Protection Program experience is misplaced, arguing that those response rates were attributable to the program's emergency nature, and the rush by all parties to submit and process applications. Commenters also noted that Paycheck Protection Program may not inform the likely response rates under this rule because that program covered a wider range of businesses than the Bureau's proposal.

Purported conflicts with ECOA and Regulation B. Some commenters raised concerns about conflicts between the proposed requirement and subpart A of Regulation B and ECOA. One commenter stated that the proposed requirement is prohibited by 12 CFR 202.5, which provides that a creditor may not inquire about the race, color, religion, national origin, or sex of an applicant or any other person in connection with a credit transaction. Several commenters said that the proposed requirement would require bank employees to consider factors that ECOA prohibits creditors from considering. Commenters also generally stated that the proposed requirement conflicts with the fair lending training provided to bank employees and will insert race as a factor in the credit application process.

Several commenters said that a visual observation and surname requirement would not align with, or would violate, the statutory firewall requirement, noting that the lenders would have to determine a borrower's ethnicity and race but then have to “forget” and isolate the information when making credit decisions. One requested that information collected via visual observation and/or surname not be subject to the firewall provision because of the difficulty in maintaining the firewall requirements for data collected this way.

In-person meetings. A number of commenters raised concerns that the proposed requirement would damage the relationships that community banks, traditional banks, or small- to mid-sized banks have with their customers. One asserted that in-person interactions are important for community lenders, such as CDFI banks, to understand customers, to make customers feel comfortable, and to identify products and services responsive to the needs of lower income and other underserved communities. Others emphasized that such lenders value and rely on repeated, in-person interactions with customers, saying that the proposed requirement would disproportionately affect them, but would favor large banks and online lenders that did not see applicants and thus would not have to employ the visual observation or surname analysis. One commenter suggested that all lenders should be subject to the proposed requirement, because online lenders can still conduct surname analyses. Another said that the proposed requirement would disproportionately subject CDFI lenders to the risks of reporting inaccurate data, including reputational damage, and greater operational and compliance burden. A commenter urged that the Bureau exempt community banks from the proposed requirement.

In contrast, some commenters suggested that the proposed requirement would not generate much data as a result of a shift away from in-person interactions, thus limiting or negating its value. One such commenter predicted that much small business lending will likely be through credit cards, which it said would not provide an opportunity to implement the requirement, and as a result data collected via visual observation and surname would be associated with certain loan types that may be received by higher revenue applicants.

Some commenters suggested that lenders, their employees, and applicants would try to avoid visual observation and surname analysis. Several said that the proposed requirement would discourage loan officers and applicants from meeting in person or by video call. Others stated that some banks may shift applications online, impairing the personal interaction some banks have with their communities. One commenter predicted that the proposed requirement would discourage small business applicants from seeking credit.

Another commenter argued that the proposed requirement is unnecessary because financial institutions do not always meet with the principal owners of a business. Several commenters said that ethnicity and race determinations from visual observation and surname analysis may not be representative of the applicant population, would be inconsistent, and would not be comparable to other data.

One commenter said that the requirement would be difficult to apply because a financial institution may not know if the principal owner's demographic information had already been collected to assess if the visual observation and surname requirement applies, such as in the context of a brief interaction that is later determined to be an in-person meeting that would trigger the proposed requirement. Others asked for clarity on whether the proposed requirement would be triggered if any bank employee met in person with a principal owner, even if not involved with the credit application (for example when signing closing documents). Another commenter stated that financial institutions should not be required to determine if an individual is a principal owner, a necessary condition to collect data on a principal owner's ethnicity and race via visual observation and surname analysis, if the small business applicant chooses not to disclose its ownership structure.

Litigation and compliance risk. Some commenters were concerned that the proposed requirement would subject financial institutions and their employees to enforcement actions or litigation if they erred in determining a principal owner's ethnicity or race. Several stated that despite good faith efforts, such errors could subject lenders to examiner scrutiny, litigation, negative media, and erroneous discrimination claims by third parties, or subject them to customer complaints. One commenter stated that regulators could use financial institutions' best-guess, but erroneous determinations to pursue disparate impact cases, or customers could bring discrimination cases, if they are able to reverse engineer the inadvertently incorrect ethnicity or race determinations made by financial institutions. A community group suggested that financial institutions would avoid reporting ethnicity or race at all to avoid litigation risk.

Several business advocacy groups suggested that certain lenders may use this provision to fabricate ethnicity and race data in order to make their lending practices appear more equitable, accessible, and unbiased.

Implementation and other comments. A number of commenters offered specific suggestions regarding particular aspects of the proposal, notwithstanding other objections they may have raised regarding whether it should be finalized at all. Several urged the Bureau to provide guidance materials and sample disclosures, and to engage in education efforts to encourage applicants to self-report their demographic information, with some suggesting these options in place of the proposed provision. Some said the Bureau should develop guidance that lenders could use to avoid questions of interpretation and to learn about resources they can use to make ethnicity and race determinations on the basis of a principal owner's surname. Several suggested that the Bureau provide a uniform surname classification standard.

One commenter requested an exemption from the proposed requirement (and the collection of ethnicity and race generally) for retail credit, on the grounds that many applicants will decline to provide demographic information about their principal owners given the sensitivity of the information. Other commenters stated that automobile and truck dealers had expressed concerns about the proposed requirement and did not think it would be possible to report detailed demographic information based on visual observation. Another commenter recommended that the Bureau exempt sole proprietors from the proposed requirement, noting that sole proprietor transactions are unique and may not provide meaningful data on the commercial credit market served by small, non-bank lenders.

Several commenters opposed the proposed requirement, arguing that the use of visual observation and surname is outdated. Two commenters stated that these methods employed in Regulation C were implemented many years ago, and that the Bureau should follow more current government agency practices, citing a 2021 policy memo from USDA rescinding the use of visual observation to determine ethnicity or race for certain Federal food programs. One commenter stated that, as with participants in the USDA programs, some small business owners may not want their ethnicity or race determined by others, may perceive discriminatory treatment, and may avoid applying for credit.

One commenter stated that the scope of the proposed requirement was unclear, noting that the NPRM preamble and proposed commentary provided that a financial institution would have to identify at least one principal owner by visual observation or surname if the applicant does not provide the ethnicity and race of at least one principal owner, even though institutions are obligated to collect the ethnicity, race, and sex of each of the small business applicant's principal owners. Several commenters requested that financial institutions should only be required to collect aggregate ethnicity and race categories.

One commenter suggested the use of an automated proxy analysis of surnames as an alternative to the proposed requirement. Another said that the Bureau could determine ethnicity and race with the data reported by lenders based on surname analysis.

Several commenters urged that, if the proposed requirement is finalized, demographic data should note when they are collected via visual observation or surname.

Final Rule—Collecting Ethnicity and Race via Visual Observation or Surname in Certain Circumstances

The Bureau is not finalizing its proposed visual observation and/or surname analysis requirement for the reasons set forth below. Final § 1002.107(a)(19) (proposed as § 1002.107(a)(20)) no longer includes references to the reporting of ethnicity and race based on visual observation and surname. The Bureau is likewise not adopting proposed comment 107(a)(20)–9, regarding reporting based on visual observation and/or surname; proposed comment 107(a)(20)–10, regarding meeting in person with a principal owner; and proposed comment 107(a)(20)–11, regarding the use of aggregate categories when reporting using visual observation or surname. The Bureau has also removed other references to the collection of ethnicity and race data via visual observation and/or surname from other locations in the final rule.

In making this decision, the Bureau carefully considered the numerous comments it received, the statute, the history of the use of visual observation and surname analysis under HMDA, and the recent history of the collection of demographic information related to the Paycheck Protection Program. The Bureau believes, based on its expertise and the longstanding use of visual observation and surname analysis in HMDA, that collection of demographic information via visual observation or surname analysis has the capacity to improve response rates for demographic information—without particular risk to data accuracy, introduction of bias or racial stereotyping into the underwriting process, increased litigation/compliance risk, or violations of existing ECOA/Regulation B, as suggested by some commenters. The Paycheck Protection Program experience also suggests that there may be benefits in such a requirement.

Nonetheless, the Bureau believes that a requirement to collect principal owners' ethnicity and race via visual observation or surname could pose particular challenges for small business lending that are not present in mortgage lending. For example, applicants and co-applicants are clearly identified as such in mortgage applications—making it obvious whose demographic information has, or has not, been self-reported. In contrast, this final rule—as mandated by section 1071—requires a record of the applicant's responses to a request for protected demographic information to be kept separate from the application, and prohibits inclusion of personally identifiable information in records compiled and maintained pursuant to this rule. This could make tracking whose information has, or has not, been self-reported by the applicant particularly challenging. As commenters pointed out, a financial institution might be interacting with a representative of a small business who is not a principal owner, or the institution may not know—particularly early in the application process—if a particular person is a principal owner.

In addition, the Bureau is mindful, consistent with the comments it received, that much of the lending to small businesses in smaller communities and in underserved and rural areas occurs through relationship banking that involves more frequent and more personal contact with applicants. The Bureau is also mindful of concerns raised by lenders that rely on in-person engagement that their customer relationships may be negatively impacted by customer discomfort with a visual observation and surname data collection requirement, particularly during initial implementation of this final rule. The Bureau also acknowledges the concerns expressed by commenters that bank employees may feel uncomfortable making ethnicity and race determinations on the basis of visual observation or surname. On the other hand, the Bureau acknowledges comments that the prevalence of online lending processes and use of credit cards in small business lending could mean few opportunities for in-person or video-enabled meetings and thus for the collection of ethnicity and race via visual observation or surname.

The Bureau's decision not require financial institutions to collect principal owners' ethnicity and race information via visual observation or surname at this time renders moot the comments about implementation of such a requirement, as well as those suggesting alternatives to the proposal.

The Bureau intends to actively monitor financial institutions' response rates to inquiries regarding demographic data to ensure that applicants are not being discouraged in any way from providing their demographic data pursuant to this final rule and to determine whether any future adjustments to the rule may be warranted.

107(a)(20) Number of Principal Owners

Proposed Rule

Proposed § 1002.107(a)(21) would have required financial institutions to collect and report the number of the applicant's principal owners. Proposed comment 107(a)(21)–1 would have explained that 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, proposed comment 107(a)(21)–1 explained that the financial institution would have been required to provide the definition of principal owner set forth in proposed § 1002.102(o). The proposed comment also clarified that, 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.

Proposed comment 107(a)(21)–2 would have clarified 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 have stated 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 have been required to verify the number of principal owners provided by the applicant, but if the financial institution did verify the number of principal owners, then the financial institution would report the verified number of principal owners.

Proposed comment 107(a)(21)–3 would have stated that pursuant to proposed § 1002.107(c)(1), a financial institution would be required to maintain procedures reasonably designed to collect applicant-provided information, which includes the applicant's number of principal owners. However, the proposed comment would have explained that 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.”

In addition to seeking comment on its proposed approach to the collection and reporting of the number of principal owners generally, the Bureau also sought comment on whether to instead, or additionally, require collection and reporting of similar information about owners (rather than principal owners). The Bureau raised, as an example, whether financial institutions should be required to collect and report the number of owners that an applicant has that are not natural persons.

Comments Received

The Bureau received comments on this aspect of the proposal from a number of lenders, trade associations, and community groups. Two lenders and a community group supported the Bureau's proposal for collecting and reporting the number of an applicant's principal owners. The community group stated that the information would help determine whether experiences in the small business lending marketplace are different if an owner is a woman or minority, even if a small business does not meet the criteria for a minority-owned or women-owned business. Further, knowing the number of a business's principal owners would help data users identify businesses with varying percentages of ownership by women or minorities above or below the 50 percent threshold for minority-owned or women-owned businesses. One lender stated that the number of principal owners data point, along with others proposed by the Bureau, would provide insight on the quality of capital being accessed by small businesses, assist in showing how financial institutions compare across different metrics, and help determine if an institution is engaged in equitable lending. This commenter also stated that in its experience, there are a number of small business lending programs and funding opportunities that require similar data. Thus, this commenter stated its expectation that the reporting requirements in the Bureau's final rule would satisfy requirements across a number of such programs and reduce administrative burden. Specifically, the commenter noted that it had gathered similar data on owners for Paycheck Protection Program loans it originated.

A number of lenders and trade associations opposed the Bureau's proposal to collect information about the number of an applicant's principal owners. Two such commenters stated that the information does not serve the purposes of section 1071, unless it is to allow second guessing of applicant-provided responses as to their minority-owned or women-owned status or the Bureau intends to require the collection of ethnicity, race, and sex data for all of an applicant's principal owners. One bank stated that the proposed number of principal owners data point would not offer any insight into lending patterns, as it is not considered in the underwriting process. Another bank argued that the data point is not necessary because there is no evidence that lenders use an applicant's number of principal owners as a basis for discrimination. One bank questioned the benefit of collecting such information, stating that a business's ownership and principals may change on a day-to-day basis. Another commenter stated that the information collected may inadequately or erroneously describe an applicant's ownership structure, particularly where the legal structure of the applicant's ownership may make such determinations difficult. Several commenters also stated that the data point is unnecessary, because similar information is already collected in other contexts (such as under FinCEN's customer due diligence rule) and regulators already examine banks for fair lending compliance.

Several commenters cited costs and burden as the basis for their objections. Two banks stated that it would be expensive to collect the information, with one also noting that the costs would be passed down to customers and communities. Another bank stated that because it does not collect information about the number of an applicant's principal owners currently, the proposed requirement would entail changes to its operating procedures and suggested that the Bureau could obtain this information from the Internal Revenue Service instead. With regard to indirect vehicle financing transactions, a trade association stated that information about the number of principal owners is not part of the data transmitted between dealers and finance companies and is not used for business purposes, thus technical and process changes would be needed to collect and report the data.

A few industry commenters objected to the collection and reporting of the number of an applicant's principal owners on the basis of privacy, stating that the data point could be used to identify applicants. One said that this concern was particularly relevant for small communities with limited numbers of small businesses. Two others urged the Bureau to not publish the data point publicly to protect applicants' privacy.

An agricultural lender said it was unclear how financial institutions should report the number of principal owners for family farmers. This lender emphasized that the ownership of many family farm businesses is complex and may involve multiple business entities for risk management purposes, with separate entities for different farm operations. The commenter provided as an example a situation where a person owns only one farm parcel but works several farm parcels that are owned by a parent through multiple business entities and trusts.

Some industry commenters objected to this proposed data point as part of their general objection to the Bureau's data points proposed pursuant to ECOA section 704B(e)(2)(H). These commenters generally argued that such data points, including the number of an applicant's principal owners, do not add value or advance the purposes of achieving fair lending or of ECOA; are not used or collected for underwriting or financial analysis; go beyond what other laws require financial institutions to collect; add unnecessary complexity and detail to the rule; and would add to the burden and costs for implementing the rule, especially for small covered financial institutions.

Two industry commenters objected to the data point on the grounds that in the absence of other information about an applicant's ownership, such as the number of owners or percentages of ownership, the information could lead to incorrect assumptions about the ownership structure of a small business applicant. For example, the commenters noted that if demographic data are reported for one individual, it could lead to a conclusion that the applicant has only one principal owner, when the applicant has several owners, but only one with more than a 25 percent ownership share.

Two commenters urged the Bureau to provide a regulatory safe harbor for reporting information about an applicant's number of principal owners, as part of a global safe harbor for all applicant provided data, or a safe harbor similar to that in proposed § 1002.112(c).

Several community groups suggested additional data points related to ownership. One such commenter suggested that the Bureau require financial institutions collect and report the percentage amount of a principal owner's ownership. This information, argued the commenter, would enable the Bureau to refine its data and reveal specific disparities in lending by ownership composition. Another commenter suggested that the Bureau require financial institutions to ask applicants for the number of individuals who own less than 25 percent of the applicant, to provide more insight on the distribution of small businesses and their experiences. One other commenter instead suggested that the Bureau add additional data points to measure the percentage of ownership by women and by people of color, to further enable evaluations of access to credit based on the proportion of ownership and control by such individuals.

A joint letter from community and business advocacy groups requested that the Bureau clarify proposed comment 107(a)(21)–3, which stated that if a financial institution is unable to collect or “otherwise determine” an applicant's number of principal owners, the financial institution should report it as unknown. The community groups asked the Bureau to clarify the meaning of the phrase “otherwise determine,” and specifically whether financial institutions may limit its investigation to documents obtained from the applicant in the normal course of an application, or if they have an obligation to conduct a due diligence investigation of corporate records.

Final Rule

For the reasons set forth herein, the Bureau is finalizing the requirement for financial institutions to collect and report the number of an applicant's principal owners, renumbered as § 1002.107(a)(20), and its associated commentary. In consideration of the comments received, the Bureau is doing so 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 and under ECOA section 704B(e)(2)(H), which 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 the information will provide important context for other information collected and reported under the rule and thus serve the purposes of section 1071. The Bureau acknowledges that, as argued by commenters, the number of an applicant's principal owners may not be information considered by financial institutions in the underwriting process or, by itself, serve as the basis of discrimination. However, as noted by other commenters, information about the number of small businesses' principal owners will help data users, including the Bureau, understand how small business applicants' experiences in the lending marketplace differ on the basis of the demographic composition of their ownership and identify business and community development needs and opportunities. Thus, even if an applicant is not a women-owned, minority-owned, or LGBTQI+-owned business under § 1002.107(a)(18), through the number of principal owners data point, data users will still have some insight into what proportion of the small business's ownership has the demographic characteristics provided by the applicant.

The Bureau acknowledges some commenters' concerns that the number of principal owners data point would not provide a comprehensive picture of an applicant's ownership structure. Final § 1002.102(o) defines a principal owner as an individual who directly owns 25 percent or more of the equity interests of a business. As a result, the requirement to collect information about the number of an applicant's principal owners will not account for individuals with either indirect ownership or less than 25 percent ownership in the business. However, the Bureau believes that this supports, rather than counsels against, inclusion of this data point in the final rule.

The Bureau also is not adding other data points related to ownership to the final rule. The Bureau considered the general likelihood that an individual responding for the applicant would know the information being requested in formulating its proposal. The Bureau believes that applicants are likely to know the number of its principal owners and will be willing to provide that information. Overall, the Bureau believes that the number of principal owners data point, particularly in combination with information about an applicant's business statuses under § 1002.107(a)(18), strikes a balance so that the Bureau is likely to receive useful data that will allow it and others to develop a nuanced understanding of small business lending practices generally, even if it does not present a complete picture of each applicant's ownership structure.

The Bureau does not believe that the fact that some applicants have complicated ownership structures necessitates removal of this data point from the final rule. Although some small business applicants, such as family farmers, may have ownership structures where there are many owners and/or where ownership is through various business entities, the rule's definition for principal owner means that applicants would be required to identify only individuals, and not entities or trusts, with direct ownership in the business and would not need to trace ownership through multiple business entities or provide information about individuals with small equity shares in the business. Under comment 107(a)(20)–1, this definition would be provided to an applicant in conjunction with the request for the number of its principal owners. The Bureau believes that the straightforward definition in § 1002.102(o) will assist applicants in providing this information.

Further, the Bureau believes the information about the number of an applicant's principal owners will be useful and facilitate the purposes of section 1071, even if a specific applicant's ownership changes over time. Under the Bureau's proposal, as with the final rule, applicants are asked for information in relation to individual, covered applications to allow data users, in the aggregate, to ascertain lending patterns at the institution or community levels. The data meets the final rule's purposes if it is accurate at the time the data are collected. Identifying changes in ownership over time will also further the business and community development and fair lending purposes of section 1071.

Some commenters suggested that the number of principal owners data point should not be required under the final rule because similar information is collected in other contexts. However, the definition of principal owner under § 1002.102(o) has been specifically tailored by the Bureau to meet the purposes of section 1071. Information about differently defined owners under different regulatory regimes, reported to other regulatory authorities, does not facilitate section 1071's purposes of fair lending enforcement and identification of business and community development needs and opportunities, nor could such data be matched to a particular covered application reported under section 1071.

With respect to commenters' arguments that the additional burden and costs that would result from the number of principal owners data point warrant its removal from the final rule, the Bureau notes first that commenters did not identify any specific costs or burdens with reporting the number of principal owners data point in particular, as much as concern about the costs and burden of reporting data points adopted pursuant to the Bureau's statutory authority in ECOA section 704B(e)(2)(H) generally. The Bureau acknowledges that financial institutions will experience some initial expenses and burden in implementing new regulatory data collection requirements. However, the Bureau understands that financial institutions already collect and maintain information about the ownership of certain businesses under FinCEN's customer due diligence rule. The Bureau does not believe that there will be significant costs and burden associated with collecting and reporting information about applicants' principal owners specifically, as opposed to generally as part of a new data collection regime. The Bureau considers the data points it is adopting pursuant to section 704B(e)(2)(H)—including the number of an applicant's principal owners and the corresponding costs and burden to implement their collection—necessary to facilitate the purposes of section 1071.

The Bureau does not believe that a specific safe harbor is necessary for reporting the number of an applicant's principal owners, as urged by commenters. As provided in final comment 107(a)(20)–2 (proposed as comment 107(a)(21)–2), a financial institution is entitled to rely on the statements provided by the applicant in collecting and reporting the information provided by the applicant. As a result, any such good faith reporting by a financial institution of the number of an applicant's principal owners that the financial institution has no reason to believe is inaccurate will not be a violation of the regulation's requirements.

In response to commenters' concerns that information about an applicant's number of principal owners may be used to identify applicants, the Bureau will review the data received to complete the full privacy analysis to determine the privacy risks associated with the publication of the application-level data as discussed in part VIII, below. The Bureau takes the privacy of such information seriously and will be making appropriate modifications and deletions to any data before making it public.

With respect to commenters' request that the Bureau clarify financial institutions' obligation to determine the number of an applicant's principal owners, the Bureau believes that the proposed commentary is sufficiently clear and does not need to be revised. The Bureau's intent in proposed comment 107(a)(21)–3 that a financial institution report that the number of principal owners is “not provided by the applicant and is otherwise undetermined” was to refer to the possibility that a financial institution may not know the number of the applicant's principal owners if, despite maintaining reasonably designed procedures to obtain the information, the applicant does not provide the information and the financial institution does not otherwise verify such information. The Bureau has also revised comment 107(b)–1 to clarify what information may be used to verify information. Given these other statements in the commentary, the Bureau does not believe that further clarification of financial institutions' obligation to determine the number of an applicant's principal owners is necessary.

As explained in the section-by-section analysis of § 1002.102(o), the Bureau has changed the definition of principal owner to use the term “individual” instead of “natural person” for comprehensibility reasons. Accordingly, the commentary for final § 1002.107(a)(20) has likewise been updated to refer to individuals and not natural persons.

To streamline the commentary, the Bureau has revised comment 107(a)(20)–1 (proposed as 107(a)(21)–1) to remove the first sentence as to requesting the number of an applicant's principal owners from the applicant or determining such information from other information, as duplicative of content in comment 107(b)–1, which applies to the number of principal owners data point. For similar reasons, it has removed the last sentences of comments 107(a)(20)–1 and –2, regarding the use of previously collected data and about verification, as straightforward applications of final § 1002.107(d) and (b), respectively, that would not provide any new content. Otherwise, the Bureau is substantially finalizing the commentary for § 1002.107(a)(20) with changes to reflect updated numbering for the data point and also updating and adding cross-references to other parts of the final rule.

107(b) Reliance on and Verification of Applicant-Provided Data

Proposed Rule

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)].” Section 1071 does not impose any requirement for a financial institution to verify the information provided by an applicant.

During the SBREFA process, a number of small entity representatives urged the Bureau to require collection and reporting of a number of data points based only on information as provided by the applicant. No small entity representatives stated that they thought verification should be generally required. The industry stakeholders who commented on this issue asked that the Bureau not require verification of applicant-provided information. The Bureau did not receive any comments on this issue from community group stakeholders during the SBREFA process.

The Bureau proposed 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 verified the information provided, in which case it would be required to collect and report the verified information. The Bureau believed that requiring verification of collected data would greatly increase the operational burden of the rule. Proposed comment 107(b)–1 would have explained that a financial institution could rely on statements made by an applicant (whether made in writing or orally) or information provided by an applicant when compiling and reporting applicant-provided data; the financial institution would not be required to verify those statements. Proposed comment 107(b)–1 would have further explained, however, that if the financial institution did 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 have gone 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 have been collected from tax return documents. In addition, the proposed comment would have made 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).

The Bureau sought comment on its proposed approach to verification of the 1071 data points, including the specific guidance that would have been presented in comment 107(b)–1. The Bureau also sought comment on whether financial institutions should be required to indicate whether particular data points being reported have been verified or not.

Comments Received

The Bureau received comments on this aspect of the proposal from numerous lenders, trade associations, community groups, and a business advocacy group. Several lenders and trade associations supported the proposed provision, agreeing with the Bureau that requiring verification of collected data would greatly increase the operational burden of the rule. These commenters did not object to reporting verified information when a financial institution verifies applicant statements for its own business purposes. Several of these commenters did, however, object to the possible inclusion of a provision requiring financial institutions to flag whether or not they had verified reported data, a question that the NPRM had sought comment on. Although these commenters did not discuss reasons for objecting to the verification flag, the context suggests that they were concerned about the operational difficulty of carrying out such a provision.

Several banks and trade associations supported the ability to rely on unverified applicant-provided data, but objected to the requirement to report verified information when the financial institution verifies applicant statements for its own business purposes. Some of these commenters pointed out that verification may happen after the initial application, different lenders have different methods of verification, and updating the information for reporting would be operationally difficult. One of these commenters stated that the verification may be carried out by different staff using different platforms, and section 1071 does not mention verification. Other commenters suggested that the term “verification” was not sufficiently clear, and sometimes a financial institution would collect documents such as tax forms that contain information that conflicts with applicant statements, for example a different NAICS number, even though the financial institution is not “verifying” that data point. Other commenters expressed concern about how reporting information verified later would affect use of the “firewall.” A group of trade associations stated that collecting the verified information would provide little benefit and the already difficult implementation of the rule would be made even more onerous by this provision. In addition, one commenter stated that the verification provision was similar to HMDA, which they considered to be very onerous.

A community group and a women's business advocacy group suggested that the final rule should require additional verification. The community group stated that verification of a few key data points that are generally verified by lenders now, such as gross annual revenue, or that can be easily checked, such as the NAICS code, should be required. A business association urged the Bureau to look into ways to verify that the correct information is offered and reports are accurate.

Final Rule

For the reasons set forth herein, the Bureau is finalizing § 1002.107(b) with additional language making clear that a financial institution may rely on information from appropriate third-party sources as well as the applicant, and other edits for clarity. Final § 1002.107(b) provides that unless otherwise provided in subpart B, the financial institution may rely on information from the applicant, or appropriate third-party sources, when compiling data. Section 1002.107(b) further states that if the financial institution verifies applicant-provided data, however, it shall report the verified information.

The Bureau is also finalizing associated comment 107(b)–1 with phrasing edits similar to those in the regulation text, and revised and additional cross-references to facilitate compliance. Final comment 107(b)–1 explains 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 applicant-provided data; the financial institution is not required to verify those statements or that information. Comment 107(b)–1 further explains, however, that if the financial institution does verify applicant statements or information for its own business purposes, such as statements relating to gross annual revenue or time in business, the financial institution reports the verified information. The comment also makes clear that when collecting certain applicant-provided data, depending on the circumstances and the financial institution's procedures, a financial institution may collect and rely on information from appropriate third-party sources without requesting it from the applicant. The comment then provides further guidance on collection and verification of applicant-provided data, including a list of applicant-provided data points. In order to facilitate compliance, final comment 107(b)–1 also adds references to two comments that explain restrictions regarding verification of certain data points.

The Bureau believes that requiring verification of applicant-provided data points would greatly increase the operational burden of the rule, and that relying on applicant-provided data, whether directly from the applicant or through appropriate third-party sources, will ensure sufficient accuracy to carry out the purposes of section 1071. As explained 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 this final rule) information that they have already verified will only add slight operational difficulty, and will 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 fact that the statute does not use the specific word “verification” is not relevant to this issue because the verification that the financial institution chooses to carry out is a standard part of compiling and maintaining the information provided by the applicant. The Bureau also believes that this requirement will improve the quality and usefulness of the resulting dataset, thereby furthering the purposes of section 1071.

In regard to the possibility of the final rule requiring financial institutions to report whether or not certain data points have been verified, the Bureau notes that no commenters expressed support for this idea, while several opposed it. The Bureau believes that such a requirement would impose considerable operational difficulty, and it is not clear that any uses of this information would justify the increased burden. Consequently, the final rule does not include this provision.