As we mentioned in the July edition of Banking on BCC, the CFPB released Frequently Asked Questions (FAQs) on the Section 1071 Small Business Lending Data Rule in late June. These FAQs focus on two timely topics, Institutional Coverage and Covered credit transactions and small businesses.
It’s important to have a good understanding of these areas so you can determine IF and WHEN you will become subject to the Rule. Here are a few key points from the FAQs:
- … if multiple financial institutions are involved in the origination of a covered credit transaction to a small business, a financial institution is only required to count that origination if it is the last financial institution with authority to set the material terms of the transaction.
- …a small business is one that had gross annual revenue of $5 million or less in its preceding fiscal year… A small business must be a for-profit business, but it can take various forms. It can be a corporation, a partnership, a limited liability company, a joint venture (with no more than 49 percent participation by foreign businesses), a sole proprietorship, an association, a trust, or a cooperative. A small business does not include a non-profit organization or a governmental entity.
- HMDA-reportable loans are not covered credit transactions, and thus are not counted as covered originations. It does not matter if the financial institution is subject to HMDA or if the financial institution actually reports the loan pursuant to HMDA/Regulation C.
- …a financial institution is not required to count extensions, renewals, or other amendments when counting the number of covered credit transactions that it originated to small businesses…However…, it is required to count refinancings that are covered credit transactions originated to small businesses.
- …a financial institution does not include an individual’s personal income when calculating a sole proprietorship’s gross annual revenue because it is not revenue earned by the for-profit business applying for a covered credit transaction. Gross annual revenue is the amount of money earned by the business itself, before subtracting taxes and other expenses.
It was good to see the CFPB release these FAQs and provide clarification since we’ve also received questions from clients regarding these topics. We anticipate there will be more as we move along.
Published
2023/08/08