On March 30, 2023, the Consumer Financial Protection Bureau
(CFPB) issued the small business lending rule (Final Rule) which
implements the small business lending data collection requirements
set for in Section 1071 of the Dodd-Frank Act (Section 1071).
Section 1071 amended the Equal Credit Opportunity Act (ECOA) to
require financial institutions to compile data regarding certain
business credit applications and report that data to the CFPB.

Under the Final Rule, lenders who originate at least 100 covered
originations in each of the two preceding calendar years would be
required to collect and report information about the small business
credit applications they received, including geographic and
demographic data, lending decisions and the price of credit. These
data points include: (i) a unique identifier, (ii) the application
date; (iii) the application method; (iv) the application recipient
(either directly or indirectly from a third party); (v) the action
taken by the covered financial institution on the application; and
(vi) the action taken date. There are additional data points for
reportable applications that are denied, such as the principal
reason for denial. There are also additional data points for
reportable applications that are approved but either not accepted
or that do not result in an origination including, the amount
approved and pricing information, including interest rate,
origination charges and broker fees among others. Additionally, the
Final Rule requires a covered financial institution to report data
points concerning the credit being applied for, information related
to the applicant’s business, such as the gross revenue and
demographic information from the application, including the
principal owners’ ethnicity, race and sex. Generally, a covered
origination is a covered credit transaction that the financial
institution originated to a small business and a covered
transaction is an extension of business credit under Regulation B,
which include loans, lines of credit, credit cards, merchant cash
advances and credit products used for agricultural purposes.

The Final Rule has been criticized by financial institutions and
banking trade groups in Texas and Kentucky for exponentially
expanding the data points required by Section 1071.

In Texas, the Texas Bankers Association, Rio Bank, and the
American Bankers Association (Plaintiffs) filed an action for
declaratory and injunctive relief in the US District Court for the
Southern District of Texas. The plaintiffs allege that that Final
Rule will require banks to develop and implement new software and
compliance mechanisms and as a result, smaller lenders will be
driven from the market, causing a decrease in the products
available to small businesses. Additionally, Plaintiffs argue that
the Final Rule should not be enforced until the Supreme Court
decides whether the CFPB’s funding structure violates the
Appropriations Clause of the Constitution. Community Fin.
Servs. Ass’n of Am., Ltd. v. Consumer Financial Protection
Bureau, 51 F.4th 616, 623 (5th Cir. 2022), cert. granted, 215
L. Ed. 2d 104, 143 S. Ct. 978 (2023). Community Financial
Services is scheduled for oral arguments in October 2023 and a
decision will likely be issued in early 2024.

Plaintiffs filed a motion for a nationwide preliminary
injunction (PI) to prevent the CFPB from enforcing the final rule,
which was granted in part and denied in party on July 31, 2023. The
Court declined to grant the nationwide relief requested by
Plaintiffs and instead granted preliminary relief that only limited
to the Plaintiffs and their bank members. Since the PI was granted,
other banks and banking trade associations have moved to intervene
in that action so that they too are protected under the PI.

The CFPB faces the same criticism in the US District Court of
the Eastern District of Kentucky. A group of banks and the Kentucky
Bankers Association filed a similar lawsuit on August 11, 2023 and
motion for a preliminary injunction on August 21, 2023. The
CFPB’s opposition to that motion is due for filing on September
5, 2023.

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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.