CFPBs New Rule is Effective Oct 1, 2024

The Consumer Financial Protection Bureau (CFPB) introduced a new rule under the Dodd-Frank Act, mandating increased transparency in small business lending. 

This regulation, effective from October 1, 2024, for certain lenders, aims to gather and report data on small business loan applications. It covers a wide range of financial institutions, requiring those with at least 100 small business credit transactions in the past two years to comply.

Lenders must record specific information about each small business credit application, including the type of credit requested and demographic data about the business owners, without mandating applicants to provide this last set of information.

The data collection extends to categories such as lender-provided data, including application dates and outcomes; applicant or third-party-provided data, covering credit type and business revenue; and demographic information voluntarily provided by the applicant. This aims to identify and mitigate discriminatory lending practices.

To enforce this, financial institutions must establish protocols for respectfully requesting and handling sensitive demographic data, ensuring applicants know they are not obligated to disclose this and cannot be discriminated against based on their responses or refusal to respond. Moreover, lenders have the option to reuse certain applicant-provided data under specific conditions to streamline the process.

Enforcement of these rules will be gradual, with varying compliance dates depending on the volume of small business lending a financial institution conducts. Despite potential legal challenges to the CFPB’s authority, institutions should begin preparing to meet these requirements by reviewing their lending activities and ensuring appropriate systems and procedures are in place. The CFPB offers resources and guidance for compliance on its website.

Our Opinion:

While it may promote transparency, prevent discriminatory practices, and enhance regulatory safeguards, the rule could also impose a heavy cost burden, raise data privacy concerns, and have limited applicability. Therefore, alternative lenders must consider both the benefits and drawbacks of this rule in their strategic planning, risk management, and operational implementation to ensure their sustainability and success while complying with regulations.

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