Likely Issues for Lenders Regardless of its intended purposes, the rule creates significant and potentially costly issues for lenders, such as: • The need to develop a complex operational process to gather, store and report data on loans to small businesses; • Significant compliance and risk oversight; • The need to inquire from applicants and borrowers about detailed ownership information. • Heightened regulatory fair lending scrutiny in regard to lending to small businesses; and • Increased exposure to fair lending claims from private applicants and borrowers, and regulators. Compliance Deadline Dates The deadline for compliance with this rule depends on the number of covered small business loans the lender made in each of 2022 and 2023: • 2,500 business loans or more — comply by October 1, 2024 • 500 to 2,499 business loans — comply by April 1, 2025 • 100 to 499 small business loans — comply by January 1, 2026 A financial institution that did not originate at least 100 covered credit transactions for small businesses in each of calendar years 2022 and 2023 but subsequently originates at least 100 such transactions in two consecutive calendar years must comply no earlier than January 1, 2026. Lenders and Loans Covered by the Rule The lenders and lending activity covered by this rule are broad. The rule applies to covered financial institutions that originated at least 100 covered credit transactions for small businesses in each of the two preceding calendar years.7 Each phrase in that coverage definition must be considered: • Covered Financial Institution: A “covered financial institution” is any financial institution that has originated at least 100 covered credit transactions for small businesses in each of the preceding two calendar years.8 A “financial institution” is any partnership, company, corporation, association, trust, estate or other entity that engages in financial activity. This definition covers a wide variety of lenders, including depository institutions, online lenders, platform lenders, and commercial finance companies.9 • Small business: Essentially, a small business is one with $5 million or less in gross annual revenue during its preceding fiscal year. The definition actually refers to the definitions of “business concern” and “small business concern” in the Small Business Act (SBA), but CFPB diverges from these definitions by imposing the $5 million gross revenue limit.10 • Covered credit transaction: A credit transaction covered by the rule is an extension of credit primarily for business or commercial purposes.11 This would cover loans, lines of credit, and merchant cash advances, but would not include factoring transactions, leases, and credit secured by certain investment properties.12 • Single Family Residential Loans Not Covered — Home Mortgage Disclosure Act (HDMA)13 Overlap: If a loan meets the definition of a “covered loan” under HMDA, those loans are not covered by this new rule, and do not need to be reported as small business lending loans. This is because the new small business lending data collection rule specifically excludes all loans defined as “covered loans” in HDMA Regulation C.14 Data Collected and Reported The data collection and reporting requirements are detailed and stringent. Lenders who already do residential lending data collection and reporting under the rules implementing the HMDA will be familiar with the many types of data and the methods for collecting and reporting the data. They may find it somewhat easier to implement these small business lending requirements. However, for other lenders not already doing HMDA reporting, there are likely to be steep learning curves and difficult operational implantation processes. If a financial institution does fall within the purview of the rule, it is required to collect data on all loan applications it receives and loans it provides. The scope of the data required is wide-ranging.15 The data falls into two basic categories: • Information about the application and the loan, such as ◦ application date ◦ application method ◦ credit type ◦ amount applied for and borrowed ◦ action taken in regards to the application 7 Colorado Banker
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