CFPB extends compliance date for small business lending rule

The Consumer Financial Protection Bureau is extending the compliance dates of the small business lending rule by roughly a year, citing ongoing litigation and financial benefits for financial institutions in delaying the rule’s implementation. 

The rule, known as 1071 for its authorizing section in the Dodd-Frank Act, has been widely opposed by banks and small business lenders because it requires the collection and reporting of data on the race, ethnicity, gender and LGBTQ status of small business loan applicants. 

The CFPB said in an interim final rule slated for publication Wednesday in the Federal Register that it intends to initiate a new Section 1071 rulemaking and “anticipates issuing a notice of proposed rulemaking as expeditiously as reasonably possible.”

“Three courts have stayed the compliance dates set forth in the 2024 interim final rule for the plaintiffs and intervenors in those cases,” the CFPB said. “However, compliance dates have not been stayed for those who are not plaintiffs or intervenors in those cases. To facilitate consistent compliance across all covered financial institutions, the CFPB is extending the compliance dates set forth in the 2024 interim final rule by approximately one year.”

The year-long extension, the bureau said, should be sufficient “for the CFPB to issue a new proposal to reconsider certain aspects of the 2023 final rule.” 

The largest lenders were supposed to start collecting the data in mid-July. But the CFPB, led by acting Director Russell Vought — who is also serving as director of the Office of Management and Budget — is extending the compliance dates to July 1, 2026 for roughly 100 of the largest lenders that originated at least 2,500 transactions in the previous two years. 

The CFPB adopted tiered compliance dates based on origination volume over two years. Roughly 450 lenders fall into Tier 2, originating at least 500 covered transactions in two years, and their compliance date is January 1, 2027, while about 2,000 institutions fall into Tier 3, with at least 100 transactions in both years, with compliance by October 1, 2027, the bureau said.  

The bureau said financial institutions will benefit financially from the extension.

“By extending the compliance dates by approximately one year for all covered institutions, financial institutions will benefit by the delay in the expected costs of compliance with the 2023 final rule,” the bureau said. “The CFPB expects covered financial institutions to experience an annual ongoing cost of compliance in perpetuity. Therefore, extending the compliance dates potentially saves financial institutions approximately one year’s worth of expected annual compliance costs.”

It also said that “benefits include more efficient fair lending review prioritization by regulators and the institutions’ own use of small business lending data to better understand small business credit demand and the supply by their competitors.”

Congress mandated the small business data collection in 2010 with the passage of the Dodd-Frank Act. The rule covers a wide range of credit products besides small business loans, including term loans, lines of credit, business credit cards, online credit products and merchant cash advances.  

Last month, the CFPB said it will not enforce or supervise any companies for compliance with the small business lending rule, which was finalized under the Biden administration. In February, the CFPB said that it intended to rewrite the rule, stating in a legal filing challenging the rule that it plans to reevaluate the regulation and initiate a new rulemaking process.

In a 31-page filing in the Federal Register, the bureau said that “challenges to the 2023 final rule filed by some lenders remain ongoing in three jurisdictions,” with each of the courts staying the rule’s compliance deadlines. 

Specifically, the U.S. Court of Appeals for the Fifth Circuit, the U.S. District Court for the Eastern District of Kentucky, and the U.S. District Court for the Southern District of Florida have each stayed the compliance dates for plaintiffs, (and in the Fifth Circuit for intervenors in the case as well.) 

The Dodd-Frank Act amended the Equal Credit Opportunity Act 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. The statutory purposes of the rule are to facilitate enforcement of fair lending laws, and enable communities, governmental entities, and creditors to identify business and community development needs, much the way the Home Mortgage Disclosure Act helps regulators track discrimination in the home mortgage lending market. 

The CFPB is seeking public comment on the interim final rule. The agency said that financial institutions are permitted to continue using their small business originations from 2022 and 2023 to determine their compliance tier based on the volume of small business loans. Or they may use originations from 2023 and 2024, or from 2024 and 2025. 

In order to test procedures and systems, financial institutions can begin collecting protected demographic data a year before the new compliance date, the CFPB said. 

“Covered financial institutions need to know the new compliance dates promptly so they can appropriately plan their implementation efforts; further delay in finalizing these dates would be contrary to the public interest,” the bureau said in the Federal Register notice.