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  • Writer's pictureDouglas Nelson

New Hurdles in Small Business Lending - State of Reporting Small Business Lending to the CFPB

Getting a small business loan can be tough, as a small business might not have a developed track record of profits or other information used by lenders to extend credit. Federal law and regulations, such as the Small Business Act and the Equal Credit Opportunity Act, are supposed to ease that burden and push lenders to make loans to small businesses.

But a recent regulation in this area may shift how lenders go about extending loans and how small businesses may be affected in the process. Early in 2023, the Consumer Financial Protection Bureau (CFPB) issued a final rule to implement a portion of the Dodd-Frank Act of 2010, which directed the CFPB to create a regulation requiring lenders to collect information about their small business clients and to report that information to the CFPB.

cartoon of a small business applying for a loan at a bank

The new rule was immediately challenged in court, forcing CFPB to extend any compliance date until those challenges are resolved. If the rule becomes final—which could happen sometime in 2024—the process of creating small business loans could become far more complex and centered around collecting and reporting information about creditors to the government. Lenders and their small business clients would also have to worry about putting protections in place to preserve the confidentiality of portions of that information.

What Should I Do as a Lender? As a Small Business?

Lenders affected by the CFPB rule include traditional depository institutions (banks, credit unions, and savings associations) as well as online lenders and commercial financing companies that make applicable credit transactions. The rule narrows this category to institutions that have made more than 100 credit transactions to small businesses in the last two years, so the occasional loan to a small business outside of usual operations likely will not make you subject to the rule’s requirements.

If your lending business makes small business loans often enough for the rule to apply, you should work with an attorney to review your process for extending credit. A few questions you might ask include:

  • What information do you already take in regarding your clients, and how does it match up with the rule’s requirements?

  • How do you protect that information and keep it confidential?

  • Can you make use of CFPB’s filing instructions and sample information forms to comply with the rule, or do you have resources already in existence that can be adapted?

  • Do any other exceptions apply where your institution already reports to a government agency, such as for transactions under the Home Mortgage Disclosure Act?

Lenders should already have certain processes in place to collect and to evaluate client information, but those processes may need to be shifted or enhanced to comply with the rule.

If you are a small business hoping to receive a loan, you should also be aware of the rule and its requirements. In advance of applying for a loan, your business should attempt to ready all the relevant documents and information that your lender may request in order to comply with the rule. Having these items ready beforehand can ease the process of applying for and receiving a loan, rather than seeing delays as a result of needing to collect and report based on bits and pieces of information.

Even though the CFPB rule is currently held up in court, it is still a good idea to prepare for its implementation. Making use of the CFPB’s resources and guidance surrounding the rule, alongside the advice of an attorney, can ensure your business’s successful compliance if and when the rule goes into effect.

If you have questions about the rule and its effects, or if you know your small business will be looking for a loan in the near future, our attorneys at Moustakas Nelson LLC can help. Let us know your concerns and make an appointment by phone or through our website.

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