Small Business Lending Under the Equal Credit Opportunity Act (Regulation B)

Federal RegisterMay 31, 2023

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CONSUMER FINANCIAL PROTECTION BUREAU

12 CFR Part 1002

[Docket No. CFPB-2021-0015]

RIN 3170-AA09

Small Business Lending Under the Equal Credit Opportunity Act (Regulation B)

AGENCY:

Consumer Financial Protection Bureau.

ACTION:

Final rule.

SUMMARY:

The Consumer Financial Protection Bureau (CFPB or Bureau) is amending Regulation B to implement changes to the Equal Credit Opportunity Act (ECOA) made by section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Consistent with section 1071, covered financial institutions are required to collect and report to the CFPB data on applications for credit for small businesses, including those that are owned by women or minorities. The final rule also addresses the CFPB's approach to privacy interests and the publication of data; shielding certain demographic data from underwriters and other persons; recordkeeping requirements; enforcement provisions; and the rule's effective and compliance dates.

DATES:

Effective date:

This final rule is effective August 29, 2023.

Compliance dates:

Covered financial institutions must comply with the final rule beginning October 1, 2024, April 1, 2025, or January 1, 2026, as set forth in § 1002.114(b).

FOR FURTHER INFORMATION CONTACT:

Camille Gray, Paralegal Specialist; Kris Andreassen, Pavitra Bacon, Joseph Devlin, Amy Durant, Angela Fox, Caroline Hong, David Jacobs, Kathryn Lazarev, Lawrence Lee, Adam Mayle, Kristen Phinnessee, or Melissa Stegman, Senior Counsels, Office of Regulations, at 202-435-7700 or

https://reginquiries.consumerfinance.gov/.

If you require this document in an alternative electronic format, please contact

CFPB_Accessibility@cfpb.gov.

SUPPLEMENTARY INFORMATION:

I. Summary of the Final Rule

In 2010, Congress passed the Dodd-Frank Act. Section 1071 of that Act

amended ECOA

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. Section 1071's statutory purposes are to (1) facilitate enforcement of fair lending laws, and (2) enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.

Public Law 111-203, tit. X, section 1071, 124 Stat. 1376, 2056 (2010), codified at ECOA section 704B, 15 U.S.C. 1691c-2.

15 U.S.C. 1691

et seq.

Section 1071 specifies a number of data points that financial institutions are required to collect and report, and also provides authority for the CFPB to require any additional data that it determines would aid in fulfilling section 1071's statutory purposes. Section 1071 also contains a number of other requirements, including those that address restricting the access of underwriters and other persons to certain data; recordkeeping; publication of small business lending data; and modifications or deletions of data prior to publication in order to advance a privacy interest.

Section 1071 directs the CFPB to prescribe such rules and issue such guidance as may be necessary to carry out, enforce, and compile data pursuant to section 1071, and permits it to adopt exceptions to any requirement or to exempt financial institutions from the requirements of section 1071 as it deems necessary or appropriate to carry out the purposes of section 1071. The CFPB is adding a new subpart B to Regulation B to implement the requirements of section 1071. Key aspects of the CFPB's final rule are summarized below.

As envisioned by Congress, the small business lending rule will create our nation's first consistent and comprehensive database regarding lending to small businesses, including small farms. This will fulfill section 1071's statutory purposes by allowing Federal, State, and local enforcement agencies to assess potential areas for fair lending enforcement and by enabling a range of stakeholders to better identify business and community development needs and opportunities for small businesses, including women-owned and minority-owned small businesses. The database, again as dictated by Congress, will not reveal privacy-protected information about any particular small business applicant, and small businesses will retain control over how much of their demographic information they choose to divulge. In addition, the CFPB believes that its final rule will help to sharpen competition in credit supply by creating greater transparency around small business lending.

Scope.

The CFPB is requiring financial institutions to collect and report data regarding applications for credit for small businesses, including those that are owned by women and minorities. The CFPB is not requiring financial institutions to collect and report data regarding applications for women-owned and minority-owned businesses that are

not

small. Because more than 99 percent of women-owned and minority-owned businesses are small businesses, covering small businesses necessarily means nearly all women-owned and minority-owned businesses will also be covered. The CFPB believes that this scope is consistent with the statute and will allow the rule to carry out section 1071's purposes without requiring collection of data that would be of limited utility.

Covered financial institutions.

Consistent with language from section 1071, a “financial institution” is defined to include any partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative organization, or other entity that engages in any financial activity. The rule thus applies to a variety of entities that engage in small business lending, including depository institutions (

i.e.,

banks, savings associations, and credit unions),

online lenders, platform lenders, community development financial institutions (both depository and nondepository institutions), Farm Credit System lenders, lenders involved in equipment and vehicle financing (captive financing companies and independent financing companies), commercial finance companies, governmental lending entities, and nonprofit nondepository lenders.

For purposes of this document, the Bureau is using the term depository institution to mean any bank or savings association defined by the Federal Deposit Insurance Act, 12 U.S.C. 1813(c)(1), or credit union defined pursuant to the Federal Credit Union Act, 12 U.S.C. 1751

et seq.,

as implemented by 12 CFR 700.2. The Bureau notes that the Dodd-Frank Act defines a depository institution to mean any bank or savings association defined by the Federal Deposit Insurance Act, 12 U.S.C. 1811

et seq.;

there, that term does not encompass credit unions. 12 U.S.C. 5301(18)(A), 1813(c)(1). To facilitate analysis and discussion, the Bureau is referring to banks and savings associations together with credit unions as depository institutions throughout this document, unless otherwise specified.

The Bureau's rules, including this final rule to implement section 1071, generally do not apply to motor vehicle dealers, as defined in section 1029(f)(2) of the Dodd-Frank Act, that are predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both. 12 U.S.C. 5519.

The rule uses the term “covered financial institution” to refer to those financial institutions that are required to comply with its data collection and reporting requirements. A covered financial institution is defined as a financial institution that originated at least 100 covered credit transactions (rather than 25, as proposed) for small businesses in each of the two preceding calendar years. The CFPB is not adopting an asset-based exemption threshold for depository institutions, or any other general exemptions for particular categories of financial institutions.

The final rule also permits creditors that are not covered financial institutions to voluntarily collect and report small business lending data in certain circumstances.

Covered credit transactions.

Covered financial institutions are required to collect and report data regarding covered applications from small businesses for covered credit transactions. A “covered credit transaction” is one that meets the definition of business credit under existing Regulation B, with certain exceptions. Transactions within the scope of the rule include loans, lines of credit, credit cards, merchant cash advances, and credit products used for agricultural purposes. The CFPB is excluding trade credit, public utilities credit, securities credit, and incidental credit as proposed. In addition, the CFPB has added exclusions for transactions that are reportable under the Home Mortgage Disclosure Act of 1975 (HMDA)

and insurance premium financing. Consistent with the CFPB's proposal, factoring, leases, and consumer-designated credit that is used for business or agricultural purposes are also not covered credit transactions. In addition, the CFPB has made clear that purchases of originated covered credit transactions are not reportable.

12 U.S.C. 2801

et seq.

Covered applications.

A “covered application”—which triggers data collection, reporting, and related requirements when submitted by a small business—is defined as an oral or written request for a covered credit transaction that is made in accordance with procedures used by a financial institution for the type of credit requested. This definition of covered application is largely consistent with the existing Regulation B definition of that term. However, certain circumstances are not covered applications for purposes of this rule, even if they are considered applications under existing Regulation B. Specifically, covered applications for purposes of this rule do not include (1) reevaluation, extension, or renewal requests on existing business credit accounts, unless the request seeks additional credit amounts; or (2) inquiries and prequalification requests.

Small business definition.

A covered financial institution is required to collect and report data on a covered application from a “small business,” which the rule defines in accordance with the meaning of “business concern or concern” and “small business concern” under the Small Business Act

and Small Business Administration (SBA) regulations. However, in lieu of using the SBA's size standards for defining a small business concern, the definition in this final rule looks to whether the business had $5 million or less in gross annual revenue for its preceding fiscal year. The CFPB believes that a straightforward $5 million threshold strikes the right balance in terms of broadly covering the small business credit market to fulfill section 1071's statutory purposes while meeting the SBA's criteria for an alternative size standard.

The final rule also anticipates updates to this size standard, not more than every five years, to account for inflation. The SBA Administrator has approved the CFPB's use of this alternative size standard pursuant to the Small Business Act.

15 U.S.C. 631

et seq.

See

15 U.S.C. 632(a)(2)(C); 13 CFR 121.903.

See

15 U.S.C. 632(a)(2)(C).

Data to be collected and reported.

The rule addresses the data points that must be collected and reported by covered financial institutions for covered applications from small businesses. Congress specifically enumerated many of these data points in ECOA section 704B(e)(2); for the others, the Congress granted the CFPB express authority in 704B(e)(2)(H) to require financial institutions to compile and maintain, along with enumerated data points, a record of “any additional data that the Bureau determines would aid in fulfilling the purposes” of section 1071. Certain of these data points are or could be collected from the applicant; other data points are based on information within the financial institution's control. Covered financial institutions must not discourage an applicant from responding to requests for applicant-provided data and must otherwise maintain procedures to collect such data at a time and in a manner that are reasonably designed to obtain a response; when collecting data directly from the applicant, the rule identifies certain minimum provisions that must be included within financial institutions' procedures in order for them to be considered “reasonably designed.” The rule also addresses what financial institutions should do if, despite having such procedures in place, they are unable to obtain certain data from an applicant. Furthermore, the rule makes clear that a financial institution may rely on information from the applicant, or appropriate third-party sources, when compiling data. If the financial institution verifies particular information, however, it must report that verified information. Financial institutions are permitted to reuse previously collected data in certain circumstances, rather than having to request it from the applicant for each covered application.

As noted above, the rule includes data points that are, or could be, provided by the applicant. Some data points specifically relate to the credit being applied for: the credit type (which includes information on the credit product, types of guarantees, and loan term); the credit purpose; and the amount applied for. There are also data points that relate to the applicant's business: census tract based on an address or location provided by the applicant; gross annual revenue for the applicant's preceding full fiscal year; the 3-digit North American Industry Classification System (NAICS) code for the applicant; the number of workers that the applicant has; the applicant's time in business; and the number of principal owners the applicant has.

There are also applicant-provided data points on the demographics of the applicant's ownership: first, whether the applicant is a minority-owned business or a women-owned business, along with a new data field capturing whether the applicant is an LGBTQI+-owned business; and second, the ethnicity, race, and sex of the applicant's principal owners. The CFPB refers to these data points collectively as an applicant's “protected demographic information.” Principal owners' ethnicity and race will be collected from applicants using aggregate categories as well as disaggregated subcategories. Principal owners' sex/gender will be collected from applicants without using pre-defined response categories.

The CFPB is not finalizing its proposed requirement to have financial institutions collect race and ethnicity via visual observation or surname if an in-person applicant does not provide any ethnicity, race, or sex information for any principal owners; instead, the final rule requires that these data be reported based only on information provided by the applicant.

The CFPB is providing lenders with a sample data collection form, in both digital and paper form, to assist them in collecting protected demographic data from applicants. Although the contents of the sample form reflect certain legal requirements that financial institutions must follow, their use of the sample form is not itself required under the final rule. Rather, it is an available resource to financial institutions.

In addition, the rule includes data points that will be generated or supplied solely by the financial institution. These data points include, for all applications: a unique identifier for each application for or extension of credit; the application date; the application method (that is, the means by which the applicant submitted the application); the application recipient (that is, whether the financial institution or its affiliate received the application directly, or whether it was received by the financial institution via a third party); the action taken by the financial institution on the application; and the action taken date. For denied applications, there is also a data point for denial reasons. For applications that are originated or approved but not accepted, there is a data point for the amount originated or approved, and a data point for pricing information (which includes, as applicable, interest rate, total origination charges, broker fees, initial annual charges, additional cost for merchant cash advances or other sales-based financing, and prepayment penalties).

Firewall.

The CFPB's rule implements a requirement in section 1071 that certain data collected from applicants be shielded from underwriters and certain other persons (or, if a firewall is not feasible, a notice is given instead); the CFPB refers to this as the “firewall.”

Generally, an employee or officer of a financial institution or a financial institution's affiliate that is involved in making any determination concerning a covered application is prohibited from accessing the applicant's responses to the inquiries about protected demographic information that the financial institution makes pursuant to the rule. This prohibition does not apply to an employee or officer, however, if the financial institution determines that employee or officer should have access to an applicant's responses to its inquiries regarding the applicant's protected demographic information and the financial institution provides a notice to the applicant regarding that access. The notice must be provided to each applicant whose information will be accessed or, alternatively, the financial institution could provide the notice to all applicants. The final rule does not require specific language for this notice but does provide sample language that a covered financial institution may use. The final rule also clarifies several key points of the firewall provision.

Reporting data to the CFPB; publication of data by the CFPB and other disclosures; and privacy considerations.

Financial institutions must collect small business lending data on a calendar year basis and report it to the CFPB on or before June 1 of the following year. Financial institutions reporting data to the CFPB are required to provide certain identifying information about themselves as part of their submission. The CFPB is releasing, concurrently with this final rule, technical instructions for the submission of small business lending data in a Filing Instructions Guide.

See

CFPB,

Small Business Lending Filing Instructions Guide, https://www.consumerfinance.gov/data-research/small-business-lending/filing-instructions-guide/

The CFPB will make available to the public, on an annual basis, the application-level data submitted to it by financial institutions, subject to modifications or deletions made by the CFPB, to advance privacy interests. To ease burden on covered entities, CFPB publication of application-level data will satisfy financial institutions' statutory obligation to make data available to the public upon request. At this time, the CFPB is not making a final decision on the best way to protect privacy interests through pre-publication modification and deletion of reported data. Assessing the many comments it received in this area, the CFPB is preliminarily of the view that its privacy assessment will focus primarily on whether (and, if so, how) small business lending data, individually or in combination with other data, pose re-identification risk for small businesses and, as a result, for their owners. The CFPB also anticipates taking account of compelling risks to financial institution privacy interests. The CFPB does not anticipate that it can carry out the necessary analysis of pre-publication modifications and deletions without at least one full year of application-level data. The CFPB intends to further engage with stakeholders on the issue of data publication before it resolves on a particular approach to protecting privacy interests through modifications and deletions. Finally, the CFPB anticipates publishing select aggregate data—

i.e.,

data that does not include application-level information—before it publishes application-level data.

In addition, the final rule prohibits a financial institution or third party from disclosing protected demographic information, except in limited circumstances. Specifically, the final rule prohibits financial institutions from disclosing or providing to third parties the protected demographic information collected pursuant to the rule, except to further compliance with ECOA or Regulation B or as required by law. The final rule also limits third parties' disclosure of protected demographic information.

Recordkeeping, enforcement, and severability.

The rule addresses issues related to recordkeeping, enforcement of violations, and severability. The CFPB is also finalizing provisions regarding treatment of bona fide errors under the rule in general along with several safe harbors for particular kinds of errors. Relatedly, as explained in part VII below, covered financial institutions will also have a 12-month grace period during which the CFPB—for institutions under its jurisdiction—will not assess penalties for errors in data reporting, and will conduct examinations only to assist institutions in diagnosing compliance weaknesses, to the extent that these institutions engaged in good faith compliance efforts.

Effective and compliance dates, transitional provisions.

This final rule will become effective 90 days after publication in the

Federal Register

. The CFPB is adopting a tiered compliance date schedule because it believes that smaller and mid-sized lenders would have particular difficulties complying within the single 18-month compliance period proposed in the NPRM. Compliance with the rule beginning October 1, 2024 is required for financial institutions that originate the most covered credit transactions for small businesses. However, institutions with a moderate transaction volume have until April 1, 2025 to begin complying with the rule, and those with the lowest volume have until January 1, 2026. Covered financial institutions may begin collecting applicants' protected demographic information one year prior to their compliance date to help prepare for coming into compliance with this final rule. The CFPB is also adopting a new provision to permit financial institutions that do not have ready access to sufficient information to determine their compliance tier (or whether they are covered by the rule at all) to use reasonable methods to estimate their volume of originations to small businesses for this purpose.

Compliance and technical assistance.

The CFPB is supporting small business lenders with a variety of compliance and technical tools to help them determine if they are covered by this new rule, and if so when their obligations arise. For lenders that are covered, the agency is also making available a range of resources to assist with effective implementation of the rule, including a small entity compliance guide. These materials are available at

https://www.consumerfinance.gov/compliance/compliance-resources/small-business-lending-resources/small-business-lending-collection-and-reporting-requirements.

The CFPB is also launching a dedicated regulatory and technical support program that can provide oral and written assistance in response to stakeholder questions about collection and reporting obligations, and a range of technical resources to make it easier to report data to the CFPB. The support program and related materials are available at

https://www.consumerfinance.gov/data-research/small-business-lending-data/

. To further assist covered financial institutions that serve small business customers in their preferred languages, the CFPB will make the sample data collection form available in several languages. The CFPB is also planning to develop resources to help small businesses understand how their data are treated, the availability of the dataset, and the broader purposes of the rule.

Use of technology partners and industry consortia for accurate, cost-efficient data collection and reporting.

The final rule broadly permits financial institutions to work with third parties, including industry consortia, to develop services and technologies to aid in collecting and reporting data. So long as they meet the obligations stated in the rule, including collecting data in a manner that does not discourage small businesses from providing it, financial institutions are free to work with third parties to assist them with their compliance obligations, whether that is with respect to data collection, maintenance or reporting. The CFPB plans to work with consortia or other entities seeking to assist financial institutions to deploy industry-identified solutions. For example, the CFPB plans to provide Application Programming Interfaces in an open-source environment to assist financial institutions' technology partners to develop accurate and efficient data reporting tools.

II. Background

As discussed above, in 2010, Congress enacted the Dodd-Frank Act. Section 1071 of the Dodd-Frank Act, which amended ECOA, requires financial institutions to collect and report to the CFPB data regarding applications for credit for women-owned, minority-owned, and small businesses. Section 1071 was adopted for the dual purposes of facilitating fair lending enforcement and enabling communities, governmental entities, and creditors to identify business and community development needs and opportunities of such businesses. Section 1071 complements other Federal efforts to ensure fair lending and to promote community development for small businesses, including through ECOA, the Community Reinvestment Act of 1977 (CRA),

and the Community Development Financial Institutions (CDFI) Fund.

12 U.S.C. 2901

et seq.

The Riegle Community Development Banking and Financial Institutions Act of 1994, 12 U.S.C. 4701

et seq.,

authorized the Community Development Financial Institution Fund (CDFI Fund). The CDFI Fund is discussed in more detail in part II.F.2.ii below.

The collection and subsequent publication of more robust and granular data regarding credit applications for small businesses will provide much-needed transparency to the small business lending market. The COVID-19 pandemic has shown that transparency is essential, particularly at a time of crisis, when small businesses are in urgent need of credit to recover from economic shocks.

In addition to informing policymaking, data collected under the final rule can help creditors identify potentially profitable opportunities to extend credit. As a result, small business owners stand to benefit from increased credit availability. More transparency will also allow small business owners to more easily compare credit terms and evaluate credit alternatives, helping them to find the credit product that best suits their needs at the best price. In these different ways, the data will help stakeholders to enhance business and community development, boosting broad-based economic activity and growth. Furthermore, in the years and decades to come, the collection and publication of these data will be helpful in identifying potential fair lending violations and otherwise facilitating the enforcement of anti-discrimination laws.

Overview

Small businesses are a cornerstone of the U.S. economy. There were over 33 million small businesses in the U.S. in 2019, employing almost half of all private sector employees.

Small businesses, particularly start-ups, also generated 62 percent of new jobs since 1995.

Small businesses were hit hard by two major shocks in the last two decades. First, the Great Recession, which began in 2007, disproportionately affected small businesses.

Between 2007 and 2009, employment at businesses with under 50 employees fell by 10.4 percent, compared with 7.5 percent at larger firms,

while between 2008 and 2011, lending to small firms fell by 18 percent, compared with 9 percent for all firms.

Small businesses suffered again because of the COVID-19 pandemic. Around 40 percent of small businesses were at least temporarily closed in late March and early April 2020, due primarily to demand shocks and employee health concerns.

Across the first year of the pandemic, some

200,000 more businesses exited the market relative to historic levels.

It took until July 2021 for non-farm private sector jobs at establishments with fewer than 50 employees to recover to pre-pandemic levels.

As of mid-2022, small business loan approvals (other than for government emergency programs) still remained below pre-pandemic levels.

Off. of Advocacy, Small Bus. Admin.,

2022 Small Business Profile,

at 2, 4 (Aug. 2022),

https://cdn.advocacy.sba.gov/wp-content/uploads/2022/08/30121338/Small-Business-Economic-Profile-US.pdf

(estimating 33.2 million small businesses in the United States, accounting for 46.4 percent of employees) (2022 Small Business Profile).

Off. of Advocacy, Small Bus. Admin.,

Frequently Asked Questions About Small Business,

at 1 (Dec. 2021),

https://cdn.advocacy.sba.gov/wp-content/uploads/2021/12/06095731/Small-Business-FAQ-Revised-December-2021.pdf

(SBA OA 2021 FAQs).

See generally

Cong. Rsch. Serv.,

Small Business Administration and Job Creation

(updated Jan. 4, 2022),

https://fas.org/sgp/crs/misc/R41523.pdf

(discussing small business job creation); John Haltiwanger

et al., Who Creates Jobs? Small Versus Large Versus Young,

95 Rev. Econ. Stat. 347, 347-48 (May 2013),

https://direct.mit.edu/rest/article/95/2/347/58100/Who-Creates-Jobs-Small-versus-Large-versus-Young

(finding that young firms, which are generally small, contribute disproportionately to both gross and net job creation).

Jason Dietrich

et al.,

CFPB,

Data Point: Small Business Lending and the Great Recession,

at 9 (Jan. 23, 2020),

https://files.consumerfinance.gov/f/documents/cfpb_data-point_small-business-lending-great-recession.pdf

(finding that small business lending fell sharply during the Great Recession and recovered slowly, still not reaching pre-Recession levels by 2017).

Ayşegül Şahin

et al.,

Fed. Rsrv. Bank of N.Y., 17 Current Issues in Econ. & Fin.,

Why Small Businesses Were Hit Harder by the Recent Recession,

at 1 (2011),

https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci17-4.pdf

Rebel A. Cole, Off. of Advocacy, Small Bus. Admin.,

How Did the Financial Crisis Affect Small Business Lending in the United States?,

at 25-26 (Nov. 2012),

https://www.microbiz.org/wp-content/uploads/2014/04/SBA-SmallBizLending-and-FiscalCrisis.pdf

Alexander W. Bartik

et al., The Impact of COVID-19 on Small Business Outcomes and Expectations,

117 Proc. Nat'l Acad. Sci. 17656, 17656 (July 2020),

https://www.pnas.org/content/pnas/117/30/17656.full.pdf

Leland D. Crane

et al.,

Bd. of Governors of the Fed. Rsrv. Sys., Finance and Economics Discussion Series, 2020-089,

Business Exit During the COVID-19 Pandemic: Non-Traditional Measures in Historical Context,

at 4 (2020),

https://www.federalreserve.gov/econres/feds/files/2020089r1pap.pdf

(estimating excess establishment exits and analyzing other estimates of small business exits during the pandemic). The paper defines “exit” as permanent shutdown and calculates “excess” exits by comparing the number of exits during the 12-month period from March 2020 to February 2021 with previous years.

Id.

at 2-4.

See also

Ryan A. Decker & John Haltiwanger, Bd. of Governors of the Fed. Rsrv. Sys., FEDS Notes,

Business Entry and Exit in the COVID-19 Pandemic: A Preliminary Look at Official Data

(May 6, 2022),

https://www.federalreserve.gov/econres/notes/feds-notes/business-entry-and-exit-in-the-covid-19-pandemic-a-preliminary-look-at-official-data-20220506.html

(estimating excess establishment exits to be roughly 181,000).

ADP Rsch. Inst.,

ADP National Employment Report, https://adpemploymentreport.com/

(last visited Mar. 20, 2023) (seasonally adjusted non-farm private sector jobs at establishments with between 1-49 employees as of July 1, 2021 as compared to March 1, 2020).

Biz2Credit,

Biz2Credit Small Business Lending Index Finds April 2021 Non-PPP Loan Approval Rates Move Little for All Types of Lenders

(Apr. 2021),

https://www.biz2credit.com/small-business-lending-index/april-2021

; Biz2Credit,

Biz2Credit Small Business Lending Index Finds Business Loan Approval Rates Rose at Small Banks, dipped at Big Banks in July 2022

(July 2022),

https://www.biz2credit.com/small-business-lending-index/july-2022

(approvals as of July 2022).

During the last two decades, the small business lending landscape has also transformed. Traditional providers—namely banks—consolidated, leading to branch closures. The number of banks in the U.S. has declined from over 18,000 in 1986 to under 4,800 as of June 30, 2022 and the number of branches declined by 14 percent from 2009 to 2020.

Meanwhile, new providers and products, such as online lenders and merchant cash advances, have become increasingly prevalent in the small business lending market. Financing by merchant cash advance providers is estimated to have increased from $8.6 billion in volume in 2014 to $15.3 billion in 2017.

From 2017 to 2019, the volume may have increased further to $19 billion.

Meanwhile, financing provided by online “fintech”

lenders is estimated to have increased from $1.4 billion

in outstanding balances in 2013 to approximately $25 billion

in 2019.

Cong. Rsch. Serv.,

Small Business Credit Markets and Selected Policy Issues,

at 6 (Aug. 20, 2019),

https://fas.org/sgp/crs/misc/R45878.pdf

(decline since 1986); Fed. Deposit Ins. Corp.,

Quarterly Banking Profile,

at 6 (Aug. 2022),

https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/2022jun/qbp.pdf

(number of banks as of June 30, 2022); Bruce C. Mitchell

et al.,

Nat'l Cmty. Reinvestment Coal.,

Relationships Matter: Small Business and Bank Branch Locations

(Mar. 2021),

https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/

(branch closures).

PYMNTS,

How Long Can MCAs Avoid the `Loan' Label?

(Jan. 20, 2016),

https://www.pymnts.com/in-depth/2016/how-long-can-mcas-avoid-the-loan-label/

Paul Sweeney,

Gold Rush: Merchant Cash Advances are Still Hot,

deBanked (Aug. 18, 2019),

https://debanked.com/2019/08/gold-rush-merchant-cash-advances-are-still-hot/

. Although the article does not specify one way or the other, estimates by the underlying source, Bryant Park Capital, appear to reference origination volumes rather than outstanding balances.

See

Nimayi Dixit, S&P Glob. Mkt. Intel.,

Payment Fintechs Leave Their Mark On Small Business Lending

(Aug. 28, 2018),

https://www.spglobal.com/marketintelligence/en/news-insights/research/payment-fintechs-leave-their-mark-on-small-business-lending.

Depending on credit multiplier effects, the value of annual origination volumes could be smaller or greater than outstanding balances. Without information on outstanding balances and for the purposes of calculating a market size for small business financing in 2019, the Bureau assumes in this paper a 1:1 ratio between annual origination volumes and outstanding balances for merchant cash advance products. See part II.D below for discussion of credit multiplier effects and for market size calculations for merchant cash advance and other small business financing products in 2019.

“Fintechs” have been defined as “technology companies providing alternatives to traditional banking services, most often exclusively in an online environment,” and may overlap in part with other categories of financial institutions, such as commercial finance companies and/or providers of specialized products, including factoring and merchant cash advances. Brett Barkley & Mark Schweitzer,

The Rise of Fintech Lending to Small Businesses: Businesses' Perspectives on Borrowing,

17 Int'l J. Cent. Banking 35, 35-36 (Mar. 2021),

https://www.ijcb.org/journal/ijcb21q1a2.pdf

Id. (citing

Katie Darden

et al.,

S&P Glob. Mkt. Intel.,

2018 US Fintech Market Report,

at 5,

https://www.spglobal.com/marketintelligence/en/documents/2018-us-fintech-market-report.pdf

(2018 US Fintech Market Report)). This figure annualizes $121 million in estimated 2013 quarterly originations to $484 million in annual originations and scales up to estimated outstanding balances using the ratio between the FFIEC Call Report and the CRA data discussed in part II.D below.

2018 US Fintech Market Report at 6. This figure scales up $9.3 billion in estimated 2019 credit originations for small- to medium-sized enterprise borrowers to outstanding balances using the ratio methodology discussed in part II.D below.

Regarding trends in the small business financing landscape, the shift away from traditional providers of small business credit toward newer types of providers gives rise to both potential harm and opportunity. In terms of potential harms, bank closures may have made it more difficult for small businesses, particularly those that are already underserved, to access credit and remain open—especially in low- and moderate-income areas and rural communities. Newer providers, often offering newer products, have less experience complying with both Federal and State lending laws and regulations than traditional providers. Differences in funding models may also make non-traditional credit providers less resilient than depository banks or credit unions during shocks to the financial system such as the onset of the COVID-19 pandemic.

Additionally, they may use complex algorithms and artificial intelligence, which may create or heighten “risks of unlawful discrimination, unfair, deceptive, or abusive acts or practices . . . or privacy concerns.”

Opaque product terms and high costs can also trap business owners in cycles of debt. In terms of opportunity, some newer approaches may help applicants with low or nonexistent personal or business credit scores—including women and minorities who own or seek to start small businesses but on average have lower personal credit scores than male and white business owners

—to access credit.

Non-traditional credit providers as well as digital offerings by traditional financial institutions may also help offset decreases in lending

associated with the closure of bank branches.

Itzhak Ben-David

et al.,

Nat'l Bureau of Econ. Res.,

Why Did Small Business Fintech Lending Dry Up During March 2020,

at 1-7 (Sept. 2021),

https://www.nber.org/system/files/working_papers/w29205/w29205.pdf

(discussing how nondepository lenders faced a credit crunch in March 2020 that impaired their ability to continue funding small business borrowers despite increased demand due to the COVID-19 shock).

86 FR 16837, 16839 (Mar. 31, 2021);

See also

Erin Ruel & Robert Hauser,

Explaining the Gender Wealth Gap,

50 Demography 1155, 1165 (Dec. 2012),

https://read.dukeupress.edu/demography/article/50/4/1155/169553/Explaining-the-Gender-Wealth-Gap

(finding a gender wealth gap of over $100,000 in a longitudinal study over 50 years of a single age cohort in Wisconsin); Neil Bhutta

et al.,

Bd. of Governors of the Fed. Rsrv. Sys.,

Disparities in Wealth by Race and Ethnicity in the 2019 Survey of Consumer Finances

(Sept. 28, 2020),

https://www.federalreserve.gov/econres/notes/feds-notes/disparities-in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-consumer-finances-20200928.htm

(finding median white family wealth in 2019 of $188,200 compared with $24,100 for Black families and $36,100 for Hispanic families).

One such source of funding comes from others besides family and friends, whether high net worth individuals or “angel investors,” venture capital funds, or, in a more recent development usually facilitated by online platforms, via crowdsourcing from retail investors. Often, these early investments take the form of equity funding, which business owners are not obligated to repay to investors. However, equity funding requires giving up some ownership and control to investors, which some entrepreneurs may not wish to do. For small businesses, equity funding also tends to be somewhat more expensive than debt financing in the long run. This is for a number of reasons, including that loan interest payments, unlike capital gains, are tax-deductible.

Finally, equity investments from others besides family and friends are available to only a small fraction of small businesses.

Jim Woodruff,

The Advantages and Disadvantages of Debt and Equity Financing,

CHRON (updated Mar. 4, 2019),

https://smallbusiness.chron.com/advantages-disadvantages-debt-equity-financing-55504.html

Many small businesses instead seek debt financing from a wide range of

providers. These providers include depository institutions, such as banks, savings associations, and credit unions,

as well as online lenders and commercial finance companies, specialized providers of specific financing products, nonprofits, and a range of government and government-sponsored enterprises, among others.

For purposes of this document, the Bureau is using the term depository institution to mean any bank or savings association defined by section 3(c)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(c)(1), or credit union defined pursuant to the Federal Credit Union Act, as implemented by 12 CFR 700.2. The Bureau notes that the Dodd-Frank Act defines a depository institution to mean any bank or savings association defined by the Federal Deposit Insurance Act; there, that term does not encompass credit unions. 12 U.S.C. 5301(18)(A), 1813(c)(1). The Bureau is referring to banks and savings associations together with credit unions as depository institutions throughout this document, unless otherwise specified, to facilitate analysis and discussion.

In the past, small businesses principally sought credit from banks; however, as banks have merged and consolidated, particularly in the wake of the Great Recession, they have provided less financing to small businesses.

As noted earlier, the number of banks has declined significantly since a post-Great Depression peak in 1986 of over 18,000 institutions to under 4,800 institutions as of June 30, 2022,

while 13,500 branches closed from 2009 to mid-2020, representing a 14 percent decrease.

Although nearly half of counties either gained bank branches or retained the same number between 2012 and 2017, the majority lost branches over this period.

Out of 44 counties that were deeply affected by branch closures, defined as having 10 or fewer branches in 2012 and seeing five or more of those close by 2017, 39 were rural counties.

Of rural counties, just over 40 percent lost bank branches in that period; the rural counties that experienced substantial declines in bank branches tend to be lower-income and with a higher proportion of African American residents relative to other rural counties,

raising concerns about equal access to credit.

Rebel A. Cole, Off. of Advocacy, Small Bus. Admin.,

How Did Bank Lending to Small Business in the United States Fare After the Financial Crisis?,

at 26 (Jan. 2018),

https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf

https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx

(last visited Mar. 20, 2023).

Cong. Rsch. Serv.,

Small Business Credit Markets and Selected Policy Issues,

at 6 (Aug. 20, 2019),

https://fas.org/sgp/crs/misc/R45878.pdf (decline since 1986);

Fed. Deposit Ins. Corp.,

Quarterly Banking Profile,

at 7 (Aug. 2022),

https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/2022jun/qbp.pdf

(number of banks as of June 30, 2022).

Bruce C. Mitchell

et al.,

Nat'l Cmty. Reinvestment Coal.,

Relationships Matter: Small Business and Bank Branch Locations,

at 6 (2020),

https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/

(stating that in 2009 there were 95,596 brick and mortar full-service branches or retail locations but, as of June 30, 2020, that number had fallen to 82,086).

Bd. of Governors of the Fed. Rsrv. Sys.,

Perspectives from Main Street: Bank Branch Access in Rural Communities,

at 1, 3-4, 19 (Nov. 2019),

https://www.federalreserve.gov/publications/files/bank-branch-access-in-rural-communities.pdf

Id.

As banks have merged and the number of branches reduced, the share of banking assets has also become increasingly concentrated in the largest institutions, with banks of over $10 billion in assets representing 86 percent of all industry assets in 2021, totaling $20.3 trillion out of $23.7 trillion.

Nevertheless, banks of under $10 billion in assets continue to hold approximately half of all small business loans (using the FFIEC Call Report definition of loans of under $1 million), highlighting the importance of smaller banks to the small business lending market.

Since smaller bank credit approvals have traditionally been close to 50 percent, while large banks approve only 25-30 percent of applications, bank consolidation may have implications for small business credit access.

Since institutions under $1.384 billion in assets currently are not required to report on lending under the CRA,

it is difficult to precisely quantify the negative impact of bank consolidation and shuttered branches on small business lending and access to credit in local areas.

Qualitatively, community banks typically receive high satisfaction scores among small business borrowers, reflecting their greater commitment to relationship banking, a model of banking “used to serve families, businesses, and communities as individuals, with an emphasis on providing customized help, rather than assembly line service.”

Fed. Deposit Ins. Corp.,

Bank Data and Statistics, https://www.fdic.gov/bank/statistical/

(last visited Mar. 20, 2023);

See also

Fed. Deposit Ins. Corp.,

https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx

(last visited Mar. 20, 2023) (tabulating outstanding balances for credit extended to small- and non-small business lending by banks and thrifts over time).

See

part II.B above.

100

See

part II.D below.

Whether depository or nondepository, each provider of small business financing may assess a variety of different criteria to determine whether and on what terms to grant an extension of credit or other financing product, including business and financial performance, the credit history of the business and its owner(s), the time in business, and the industry, among other factors. Protections such as guarantees, collateral, and insurance can mitigate perceived risks, potentially enabling a lender to offer better terms or facilitating an extension of credit that would otherwise not meet lending limit or underwriting criteria. Often, government agencies—including the SBA, Federal Housing Administration, and USDA—guarantee or insure loans to encourage lenders to provide credit to borrowers that may not otherwise be able to obtain credit, either on affordable terms and conditions or at all.

101

Different lenders also employ diverse methods for assessing risk, with smaller banks generally relying more on traditional underwriting methods and typically managing multi-product relationships. Online lenders increasingly use complex algorithms, automation, and even artificial intelligence to assess risk and make underwriting decisions, with originations typically being less relationship-based in nature.

101

Cong. Rsch. Serv.,

Small Business Administration 7(a) Loan Guaranty Program

(updated June 30, 2022),

https://fas.org/sgp/crs/misc/R41146.pdf

(discussing the SBA's flagship 7(a) loan guarantee program); U.S. Dep't of Hous. & Urban Dev.,

Descriptions Of Multifamily Programs, https://www.hud.gov/program_offices/housing/mfh/progdesc

(last visited Mar. 20, 2023) (listing Federal Housing Administration mortgage insurance programs for 5+ unit residential developments); Farm Serv. Agency, U.S. Dep't of Agric.,

Guaranteed Loan Program Fact Sheet

(Mar. 2020),

https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/guaranteed_loan_program-factsheet.pdf

(discussing the USDA's Farm Service Agency guaranteed loan program).

As well as diversity in underwriting methodology and criteria, there are also considerable differences across small business financing products and providers with respect to pricing methods and repayment structures. As a result, it can be challenging to compare the competitiveness of product pricing and terms. Term loans, lines of credit, and credit cards typically disclose annualized interest rates; leases often take into account depreciation; factoring products discount an invoice's value and add a fee; and merchant cash advances apply a multiple to the value of the up-front payment.

102

Moreover, providers may add additional fees that are not standardized within industries, much less across them.

102

See part II.D below for definitions of the different product categories.

D. Estimating the Size and Scope of the Small Business Financing Market

In light of the lack of data and the heterogeneity of products and providers within the small business financing market, it can be difficult to get a clear sense of the size and scope of the market. In this part, the CFPB describes its estimates of the total outstanding balances of credit in the market, the number of institutions that are active in the small business financing market, and how the CFPB arrived at these estimates. Where possible, the CFPB tries to estimate the state of the small business financing market at the end of 2019 in order to estimate the state of the market during the year prior to the onset of the COVID-19 pandemic.

One challenge is that some of the data report the dollar value of originations and some report outstanding balances. For the purposes of this exercise and for most, but not all, products, the CFPB assumes that for every $1 originated in the market in a given year, there is approximately a corresponding $3 of outstanding balances. This assumption is based on the ratio of the 2019 FFIEC Call Report data, which totaled $721 billion in outstanding balances on bank loans to small businesses and small farms, and the 2019 CRA data, which recorded $264 billion in bank loan originations to small businesses and small farms.

103

This assumption is limited by the extent to which other small business financing products differ from loans and lines of credit, which make up the majority of financing products captured by the FFIEC Call Report data and the CRA data.

104

103

FFIEC Call Report data records outstanding balances on loans with origination amounts less than $1 million across Commercial & Industrial, Nonfarm Nonresidential, Agricultural, and Secured by Farmland lending categories.

See

FDIC Quarterly Banking Profile Time Series,

https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx

(last visited Mar. 20, 2023).

104

FFIEC Call Report data and CRA data on small business credit products also include business credit card products, but loans and lines of credit made up $713 billion out of $775 billion in outstanding balances on bank, savings association, and credit union loans to small businesses in 2019.

One important caveat to this assumption is that products with materially shorter average term lengths, for example credit cards, factoring products, and merchant cash advances, may have an inverse ratio of originations to outstanding balances. For example, top issuers of general-purpose credit cards recorded purchase volumes of two to seven times their outstanding balances in 2020. Nilson Report, Issue 1192, at 6 (Feb. 2021),

https://nilsonreport.com/publication_newsletter_archive_issue.php?issue=1192

. If business-purpose credit cards, factoring products, and merchant cash advances behaved similarly with respect to the ratio of originations to outstanding balances, then for every $1 originated in the market in a given year, there could be a corresponding $0.14-0.50 in outstanding balances for such products ($1 divided by two to seven).

As detailed in this section, the CFPB estimates that the market for small business financing products totaled $1.4 trillion in outstanding balances in 2019. The CFPB estimates that small business financing by depository institutions makes up just over half of small business financing by private institutions. In 2020 and 2021, COVID-19 emergency lending programs added a further $1 trillion to this value, bringing the overall size of the small business financing market up to $2.4 trillion. However, by July 2022, over $740 billion in Paycheck Protection Program loans had been forgiven, bringing the total market size back below $1.7 trillion.

105

Below, the CFPB estimates the market share for different small business financing products.

105

Pandemic Response Accountability Comm.,

Paycheck Protection Program: Loan Forgiveness by the Numbers

(July 2022),

https://www.pandemicoversight.gov/media/file/ppp-loan-forgiveness-fact-sheet-july-2022-updatepdf

Since the available data regarding depository institutions' small loans to businesses address term loans, lines of credit, and credit cards together, the respective shares of these three products in the overall small business financing market are difficult to assess. As detailed in this part, the CFPB estimates that together, private term loans and lines of credit constitute the largest small business credit product by value, totaling approximately $770 billion in outstanding balances in 2019. As of July 2022, outstanding balances for Economic Impact Disaster Loan Program and Paycheck Protection Program loans totaled $260 billion, bringing the total value of all outstanding loans and lines of credit to around $1 trillion.

106

Id.

Lending by banks, saving associations, and credit unions comprises the largest part of this total amount for private term loans and lines of credit. Using FFIEC Call Report data for December 2019, the CFPB estimates that banks and savings associations accounted for a total of about $721 billion in outstanding credit to small businesses and small farms as of December 2019.

107

Using NCUA Call Report data for December 2019, the CFPB estimates that credit unions accounted for a total of about $55 billion in outstanding credit to members for commercial purposes.

108

From this value, the CFPB subtracts $62 billion in credit card lending to arrive at $713 billion in outstanding balances for term loans and lines of credit. From this value, the CFPB further subtracts $134 billion in SBA guaranteed loans to arrive at $580 billion in outstanding balances for private term loans and lines of credit extended by depository institutions (

i.e.,

banks, savings associations, and credit unions) as of December 2019.

107

Calculated from FFIEC Call Report data accessed on October 18, 2022. The CFPB notes that, as discussed in part II.B above, these estimates rely on small loans to businesses as a proxy for loans to small businesses. As such, the CFPB acknowledges that the true outstanding value of credit extended to small businesses by such institutions may be different than what is presented here. For example, the small loans to businesses proxy would overestimate the value of outstanding credit if a significant number of small loans to businesses and farms are to businesses or farms that are actually large. Alternatively, the proxy would underestimate the value of outstanding credit to small businesses if a significant number of businesses and farms that are small under the rule take out loans that are larger than $1 million or $500,000, for businesses and farms, respectively.

108

Calculated from NCUA Call Report data accessed on October 18, 2022.

The remaining $190 billion in outstanding balances for private term loans and lines of credit was extended by various nondepository institutions, namely commercial finance companies, online lenders, and nondepository CDFIs.

109

There may additionally be lending that is not captured here by equipment and vehicle dealers originating loans in their own names.

Commercial finance companies specialize in financing equipment and vehicle purchases. The CFPB estimates that the value of outstanding balances on credit extended by commercial finance companies totaled approximately $160 billion. Using data from the Board's Finance Company Business Receivables data on owned assets as of December 2019, the CFPB estimates commercial finance companies outstanding credit for commercial purposes as the value of retail motor vehicle loans plus equipment loans and other business receivables, which totaled about $215 billion.

110

The CFPB further assumes that about 75 percent of this value, or $162 billion, can be attributed to loans to small businesses.

111

110

Bd. of Governors of the Fed. Rsrv. Sys.,

Finance Companies—G.20

(updated Aug. 17, 2022),

https://www.federalreserve.gov/releases/g20/hist/fc_hist_b_levels.html

. The Bureau does not include leases, since they are already counted within the product category of equipment and vehicle leasing, or wholesale loans, which it assumes are typically made to non-small businesses.

111

This methodology is consistent with the approach taken by Gopal and Schnabl (2020).

Typical “fintech” providers are characterized primarily by providing financial services exclusively in an online environment.

112

The CFPB estimates that total outstanding loan balances for such providers reached around $25 billion in 2019. Using this estimate, the CFPB scales up an estimated $9.3 billion in credit originations by online platform lenders to small and medium enterprises in 2019 to $25 billion in estimated outstanding balances, under the assumptions discussed above.

113

At the beginning of the COVID-19 pandemic and associated financial crisis, these lenders originated around $22 billion in Paycheck Protection Program loans to small businesses from March to August 2020

114

and likely continued to originate billions more during the third wave of Paycheck Protection Program loans in 2021, which represents an almost 90 percent increase or more in outstanding balances since 2019.

115

This follows already rapid growth from $1.4 billion in estimated outstanding balances in 2013.

116

112

Barkley & Schweitzer, 17 Int'l J. Cent. Banking at 35-36.

113

See

2018 US Fintech Market Report at 6. The Bureau notes that this figure may underestimate the total value of such lending because it focuses on platform lenders and may overestimate the value of lending to small businesses because it also includes credit to medium businesses. Additionally, the Bureau notes that fintechs often offer products besides loans and lines of credit, and that there is no clear demarcation between fintech, commercial finance company, and merchant cash advance provider, limiting the precision of market size estimates. Finally, fintechs often sell loans once originated to other entities, securitize their originations, or purchase loans that banks have originated, which may further present challenges to the precision of market size estimates for this market segment.

114

Small Bus. Admin.,

Paycheck Protection Program (PPP) Report

(approvals through 12 p.m. EST Apr. 16, 2020),

https://www.sba.gov/sites/default/files/2020-06/PPP%20Deck%20copy-508.pdf

; Small Bus. Admin.,

Paycheck Protection Program (PPP) Report

(approvals through Aug. 8, 2020),

https://www.sba.gov/sites/default/files/2020-08/PPP_Report%20-%202020-08-10-508.pdf

115

Per the program's intent, many Paycheck Protection Program loans have been forgiven since the program began, which likely means that outstanding balances on Paycheck Protection Program loans extended by online lenders have since declined.

See

Pandemic Response Accountability Comm.,

Paycheck Protection Program: Loan Forgiveness by the Numbers

(July 2022),

https://www.pandemicoversight.gov/media/file/ppp-loan-forgiveness-fact-sheet-july-2022-updatepdf

(reporting that $742 billion in Paycheck Protection Program loans had been forgiven by July 2022).

116

Barkley & Schweitzer, 17 Int'l J. Cent. Banking at 35-36 (citing 2018 US Fintech Market Report at

5). This figure annualizes $121 million in estimated 2013 quarterly originations to $484 million in annual originations and scales up to estimated outstanding balances using the ratio between the FFIEC Call Report and the CRA data discussed above.

The CFPB estimates the value of outstanding balances on credit extended by nondepository CDFIs to small business borrowers to be around $1.5 billion. Using reporting by the CDFI Fund for 2019, the CFPB scales down the outstanding balances for loan funds of $13.8 billion and for venture capital funds of $0.3 billion by the proportion of all CDFI lending attributable to business borrowers, which totaled $15.4 billion out of $141.2 billion.

117

CDFI Fund,

CDFI Annual Certification and Data Collection Report (ACR): A Snapshot for Fiscal Year 2019,

at 17, 22 (Oct. 2020),

https://www.cdfifund.gov/sites/cdfi/files/2021-01/ACR-Public-Report-Final-10292020-508Compliant.pdf

. To the extent that CDFI loan funds and venture capital funds extend credit to business customers at different rates than CDFI banks and credit unions, this calculation may over- or underestimate the value of lending to small businesses by nondepository CDFIs. This figure also assumes that all CDFI lending is for small businesses.

Categorized here separately so as to distinguish residential from non-residential loans, the CFPB estimates outstanding balances for loans on 5+ unit residential dwellings to total over $30 billion.

118

The CFPB scales up $11 billion in 2019 annual originations on loans of under $1 million in value at origination for 5+ unit residential dwellings to $30 billion in estimated outstanding balances, using the ratio between the FFIEC Call Report and the CRA data discussed above.

119

118

Depository institutions, discussed above, extend a sizeable proportion of loans for 5+ unit residential dwellings; both nondepository and depository institutions are included in the total for 5+ unit outstanding balances.

119

See

Mortg. Bankers Ass'n,

Annual Report on Multi-Family Lending—2019,

at 5 (2020),

https://www.mba.org/store/products/research/general/report/2019-annual-report-on-multifamily-lending

. This includes both private loans, estimated at around $18 billion, and loans extended by Fannie Mae, Freddie Mac, and the Federal Housing Administration, estimated at around $13 billion. The share of 5+ unit residential dwelling loans of all sizes extended by governmental or government-sponsored entities was 41 percent. The Bureau assumes for the purposes of this exercise that the same share is reflected in loans of under $1 million in value at origination, although arguably this share would be higher if government and government-sponsored entities extended disproportionately smaller dollar value loans on average. There is also a substantial market for commercial real estate besides 5+ unit residential dwellings not captured here due to a lack of data on loans of small size or to small businesses.

See

Mortg. Bankers' Ass'n,

MBA: Commercial, Multifamily Mortgage Bankers Originated $683B in 2021; Total Lending Tally Reaches $891B

(Apr. 15, 2022),

https://newslink.mba.org/mba-newslinks/2022/april/mba-newslink-friday-apr-15-2022/mba-commercial-multifamily-mortgage-bankers-originated-683b-in-2021-total-lending-tally-reaches-891b/

(estimating the volume of commercial real estate lending of any size to be $890.6 billion in 2021, of which multifamily lending accounted for $376 billion).

Also categorized separately from depository institution totals so as to distinguish private from government and government-sponsored loans, the CFPB estimates that outstanding balances for loans extended by the SBA and the Farm Credit System totaled around $200 billion in 2019.

120

The grand total for lending by government and government-sponsored entities would be approximately $210 billion, including 5+ unit residential dwelling loans extended by Fannie Mae, Freddie Mac, and the Federal Housing Administration, which are separately recorded within the 5+ unit residential dwelling loan product category.

The SBA, through its traditional 7(a), 504, and microloan programs as well as the Economic Impact Disaster Loan Program and funding for Small Business Investment Companies, is the largest governmental lender by value, with $143.5 billion in outstanding balances at the end of fiscal 2019.

121

As part of the Federal government's response to the COVID-19 pandemic, during 2020 and 2021 SBA lending increased in size by over $1 trillion due to the Paycheck Protection Program, which totaled almost $800 billion, and the Economic Impact Disaster Loan Program, which totaled $210 billion.

122

However, as noted above, over $740 billion in Paycheck Protection Program loans had been forgiven as of July 2022, bringing SBA outstanding loan balances back down.

123

121

Small Bus. Admin.,

Small Business Administration Loan Program Performance

(effective Mar. 31, 2022),

https://www.sba.gov/document/report-small-business-administration-loan-program-performance

. SBA guaranteed loans comprised $134 billion out of this total, which amount has been deducted from the totals for depository institutions to avoid double counting.

122

Small Bus. Admin.,

Paycheck Protection Program (PPP) Report

(approvals through May 31, 2021),

https://www.sba.gov/sites/default/files/2021-06/PPP_Report_Public_210531-508.pdf

; Small Bus. Admin.,

Disaster Assistance Update—Nationwide COVID EIDL, Targeted EIDL Advances, Supplemental Targeted Advances

(June 3, 2021),

https://www.sba.gov/sites/default/files/2021-06/COVID-19%20EIDL%20TA%20STA_6.3.2021_Public-508.pdf

; Small Bus. Admin.,

Disaster Assistance Update—Nationwide EIDL Loans

(Nov. 23, 2020),

https://www.sba.gov/sites/default/files/2021-02/EIDL%20COVID-19%20Loan%2011.23.20-508_0.pdf

123

Pandemic Response Accountability Comm.,

Paycheck Protection Program: Loan Forgiveness by the Numbers

(July 2022),

https://www.pandemicoversight.gov/media/file/ppp-loan-forgiveness-fact-sheet-july-2022-updatepdf

The Farm Credit System is another important government-related part of the small business credit landscape. The CFPB estimates that Farm Credit System lenders had around $55 billion in outstanding balances of credit extended to small farms in 2019. Using the same small loan to farms proxy as is used in the FFIEC Call Report, the CFPB estimates credit to farms with an origination value of less than $500,000. Based on the Farm Credit System's 2019 Annual Information Statement of the Farm Credit System, the CFPB estimates that outstanding balances of such small credit to farms totaled $55 billion at the end of 2019.

124

The CFPB notes that, as with the FFIEC Call Report proxy, this number may include credit to non-small farms and may exclude larger credit transactions extended to small farms. Considering credit extended with an origination value of between $500,000 and $5 million would increase the market size by $86 billion to $141 billion.

125

124

Fed. Farm Credit Banks Funding Corp.,

Farm Credit 2019 Annual Information Statement of the Farm Credit System,

at 54 (Feb. 28, 2020),

https://www.farmcreditfunding.com/ffcb_live/investorResources/informationStatements.html

125

Id.

Mostly extended by depository institutions, the CFPB estimates that the market for small business credit cards totaled over $60 billion in outstanding balances for 2020.

126

Using data from Y-14 Form submissions to the Federal Reserve Board, the CFPB estimates the value of outstanding balances for small business credit card accounts where the loan is underwritten with the sole proprietor or primary business owner as an applicant.

127

126

See

Bd. of Governors of the Fed. Rsrv. Sys., Report Forms FR Y-14M,

https://www.federalreserve.gov/apps/reportingforms/Report/Index/FR_Y-14M

(last updated Sept. 12, 2022). The Board's data are received from bank holding companies over $50 billion in assets, which represent 70 percent of outstanding balances for consumer credit cards; the corresponding percent of balances captured for small business cards is not known, so the total small business-purpose credit card market could be substantially higher or lower.

See

CFPB,

The Consumer Credit Card Market,

at 18 (Aug. 2019),

https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2019.pdf

127

Off. of Mgmt. & Budget,

Instructions for the Capital Assessments and Stress Testing Information Collection (Reporting Form FR-Y14M),

OMB No. 7100-0341, at 148 (Mar. 2020),

https://omb.report/icr/202101-7100-006/doc/108187801.

Equipment and vehicle leasing, whereby businesses secure the right to possess and use a piece of equipment or vehicle for a term in return for consideration, is another important product category that is estimated to value roughly $160 billion in outstanding balances in 2019. The CFPB estimates the total size of the equipment and vehicle leasing market for all sized businesses in 2019 to be approximately $900 billion.

128

The CFPB further assumes that small businesses comprise around 18 percent of the total

equipment and vehicle leasing market.

129

128

See

Equip. Leasing & Fin. Found.,

Horizon Report, https://www.leasefoundation.org/industry-resources/horizon-report/

(last updated Apr. 22, 2021).

129

See

Karen Mills, Harvard Bus. Sch.,

State of Small Business Lending,

at 29 (July 2014),

https://www.hbs.edu/ris/Supplemental%20Files/15-004%20HBS%20Working%20Paper%20Chart%20Deck_47695.pdf

(estimating equipment leasing outstanding balances for small business borrowers at approximately $160 billion at Dec. 31, 2013); Monitor Daily,

SEFI Report Finds Strong Performance Despite Challenges

(Oct. 21, 2014),

https://www.monitordaily.com/news-posts/sefi-report-finds-strong-performance-despite-challenges/

($903 billion market in 2014, commensurate with an 18 percent market share for small business borrowers at the time of the Karen Mills report).

Factoring is a similarly significant product type, estimated at around $100 billion in market size for 2019.

130

In a factoring transaction, factors purchase, at a discount, a legally enforceable claim for payment (

i.e.,

accounts receivables or invoices) for goods already supplied or services already rendered by a business for which payment has not yet been made in full; hence, a factor's risk related to repayment lies with the business's customer and not the business itself. In most cases, specific companies, called factors, provide factoring products.

130

See

Secured Fin. Found.,

2019 Secured Finance: Market Sizing & Impact Study Extract Report,

at 7 (June 2019),

https://www.sfnet.com/docs/default-source/data-files-and-research-documents/sfnet_market_sizing___impact_study_extract_f.pdf?sfvrsn=72eb7333_2

. This study estimated the total volume of the U.S. factoring market to be $101 billion. To the extent that factoring volumes differ from outstanding balances, the value of outstanding balances may be higher or lower than this estimate. Also, this estimate captures factoring for business borrowers of all sizes, not just small business borrowers. The CFPB assumes that most factoring is provided to small business customers.

The market for merchant cash advances continues to develop rapidly and data are even more scarce than for other segments of the small business lending market. This limits the reliability of estimates as to the merchant cash advance market's size. The CFPB estimates the 2019 market size to be around $20 billion.

131

The merchant cash advance market is also of particular significance for smaller and traditionally underserved businesses that may not qualify for other types of credit.

132

Merchant cash advances are typically structured to provide a lump sum payment up front (a cash advance) in exchange for a share of future revenue until the advance, plus an additional amount, is repaid. Unlike the majority of other small business financing products, merchant cash advances typically purport to be for short durations.

133

The CFPB understands that merchant cash advances also tend to be relatively high-cost products.

134

Several States, including New York and California, are implementing laws that will require providers of “sales-based financing,” such as merchant cash advances, as well as other nondepositories to provide disclosures (including estimated APR in some States) similar to those required under the Truth in Lending Act (TILA),

135

which generally only applies to consumer credit.

136

131

Paul Sweeney,

Gold Rush: Merchant Cash Advances are Still Hot,

deBanked (Aug. 18, 2019),

https://debanked.com/2019/08/gold-rush-merchant-cash-advances-are-still-hot/

. BPC estimates appear to reference origination volumes rather than outstanding balances.

See

Nimayi Dixit, S&P Glob. Mkt. Intel.,

Payment Fintechs Leave Their Mark On Small Business Lending

(Aug. 28, 2018),

https://www.spglobal.com/marketintelligence/en/news-insights/research/payment-fintechs-leave-their-mark-on-small-business-lending

Depending on credit multiplier effects, the value of annual origination volumes could be smaller or greater than outstanding balances. Without information on outstanding balances and for the purposes of calculating a market size for small business financing in 2019, the CFPB assumes in this paper a 1:1 ratio between annual origination volumes and outstanding balances for merchant cash advance products. See above for discussion of credit multiplier effects.

132

Cf.

Barbara Lipman & Ann Marie Wiersch, Bd. of Governors of the Fed. Rsrv. Sys.,

Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender websites,

at 3 (Dec. 2019),

https://www.federalreserve.gov/publications/files/what-small-business-borrowers-find-when-browsing-online-lender-websites.pdf

(observing that online lenders, including providers of merchant cash advance products, position themselves as offering financing to borrowers underserved by traditional lenders).

133

See id.

(stating that merchant cash advances are generally repaid in three to 18 months).

134

Id.

(stating that annual percentage rates on merchant cash advance products can exceed 80 percent or rise to triple digits).

See also

Fed. Trade Comm'n,

`Strictly Business' Forum, Staff Perspective,

at 5 (Feb. 2020),

https://www.ftc.gov/system/files/documents/reports/staff-perspective-paper-ftcs-strictly-business-forum/strictly_business_forum_staff_perspective.pdf

(observing stakeholder concern about the high-cost of merchant cash advances that can reach triple digit annual percentage rates).

135

15 U.S.C. 1601

et seq.

136

New York State law requires that providers of “sales-based financing” provide disclosures to borrowers that include calculations of an estimated annual percentage rate in accordance with the CFPB's Regulation Z, 12 CFR part 1026.

See

N.Y. S.898, section 803(c) (signed Jan. 6, 2021) (amending S.5470-B),

https://legislation.nysenate.gov/pdf/bills/2021/s898

. The New York Department of Financial Services is currently developing regulations to implement the law.

See

N.Y. Dep't of Fin. Servs.,

Proposed Financial Services Regulations, https://www.dfs.ny.gov/industry_guidance/regulations/proposed_fsl

. Similarly, California's Department of Financial Protection and Innovation has adopted regulations to implement a California law requiring disclosures by commercial financing companies, including those providing sales-based financing.

See

10 Cal. Code Reg. 900(a)(28) (effective Dec. 9, 2022) (defining sales-based financing as “a commercial financing transaction that is repaid by a recipient to the financer as a percentage of sales or income, in which the payment amount increases and decreases according to the volume of sales made or income received by the recipient” and including “a true‐up mechanism”); 10 Cal. Code Reg. 914 and 940 (requiring sales-based financing providers disclosure estimated annual percentage rate according to Regulation Z, 12 CFR part 1026). Under these laws, providers of commercial financing generally will be required to disclose: (1) the total amount financed, and the amount disbursed if it is different from the total amount financed; (2) the finance charge; (3) the APR (or the estimated APR for sales-based financing and factoring transactions), calculated in accordance with TILA and Regulation Z; (4) the total repayment amount; (5) the term (or the estimated term for sales-based financing) of the financing; (6) periodic payment amounts; (7) prepayment charges; (8) all other fees and charges not otherwise disclosed; and (9) any collateral requirements or security interests.

See

Cal. S.B. 1235 (Sept. 30, 2018),

https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235

; N.Y. S.B. S5470B (July 23, 2020),

https://legislation.nysenate.gov/pdf/bills/2019/S5470B

. Other States, including Virginia and Utah, have passed commercial financing disclosure laws that do not require disclosure of the APR.

See

Virginia H. 1027 (enacted Apr. 11, 2022),

https://lis.virginia.gov/cgi-bin/legp604.exe?221+ful+CHAP0516

; Utah S.B. 183 (enacted Mar. 24, 2022),

https://le.utah.gov/~2022/bills/static/SB0183.html

Finally, trade credit is another significant market, which the Bureau estimates to total $51 billion in outstanding balances in 2019. The Bureau estimates the trade credit market size by adding the total accounts payable for businesses under $1 million in annual revenue.

137

Considering the total value of accounts payable for businesses between $1 million and $5 million would increase the market size by $88 billion.

138

Trade credit is an often informal, business-to-business transaction, usually between non-financial firms whereby suppliers allow their customers to acquire goods and/or services without requiring immediate payment.

137

See

Fundbox/PYMNTS.com,

The Trade Credit Dilemma,

at 11 (May 2019),

https://www.pymnts.com/wp-content/uploads/2019/05/Trade-Credit-Dilemma-Report.pdf

(estimating accounts payable for businesses with revenue of under $250,000 at $6.7 billion and for businesses with revenue of $250,000 to $999,000 at $44.6 billion).

138

Id.

The trade credit market is estimated to total $1.6 trillion across all business sizes in the United States. In the overall $1.4 trillion market size total for all small business financing products, the CFPB has included only the trade credit market for businesses of up to $1 million in revenue for consistency with its White Paper.

The CFPB estimates that there were approximately 8,200 financial institutions extending small business financing in 2019, almost 80 percent of which were depository institutions.

139

This number has increased from 8,100 financial institutions estimated in the NPRM for two reasons related to the number of nondepository financial institutions participating in the credit market for 5+ unit residential dwellings in 2019. First, the CFPB revised its methodology for excluding depository institutions from the total number of participants active in the credit market for 5+ unit residential dwellings, as detailed below. Second, the NPRM total for all financial institutions active in the small business financing market

included only those nondepository financial institutions participating in the credit market for 5+ unit residential dwellings estimated to be covered by the proposed rule rather than all those active in the market at all.

Based on FFIEC Call Report data for December 2019, the CFPB estimates that about 5,100 banks and savings associations were active in the small business lending market, out of a total of about 5,200 banks and savings associations.

140

The CFPB assumes that a bank or savings association is “active” in the market if it reports a positive outstanding balance of small loans, lines of credit, and credit cards to businesses.

140

Calculated from FFIEC Call Report data accessed on October 18, 2022. Although 2019 figures are used here for consistency across types of lenders, consolidation among depository institutions has continued since 2019. As of June 30, 2022, 4,692 commercial banks or savings associations and 1,575 credit unions reported a positive outstanding balance of small loans, lines of credit, and credit cards to businesses. Calculated from FFIEC Call Report data accessed on October 14, 2022.

Based on the NCUA Call Report data for December 2019, the CFPB estimates that about 1,200 out of 5,300 total credit unions were active in the small business lending market.

141

The CFPB defines a credit union as “active” in the market if it reported a positive number of originations of loans, lines of credit, and credit cards to members for commercial purposes in 2019.

141

Nat'l Credit Union Admin.,

2019 Call Report Quarterly Data, https://www.ncua.gov/analysis/credit-union-corporate-call-report-data/quarterly-data

(last updated Mar. 8, 2023). (One hundred twelve credit unions were not federally insured as of December 2019 but are included here as depository institutions. Calculated from NCUA Call Report data accessed on June 8, 2021.) Although 2019 figures are used here for consistency across types of lenders, consolidation among depository institutions has continued since 2019. As of June 30, 2022, 1,120 credit unions reported a positive number of originations of loans, lines of credit, and credit cards to members for commercial purposes during the first half of 2022. This number was calculated from NCUA Call Report data accessed on October 14, 2022.

The CFPB estimates that there were about 1,900 nondepository institutions active in the small business financing market in 2019,

142

accounting for around $550 billion in outstanding credit to small businesses. This total number of nondepository institutions includes approximately 300 commercial finance companies, 30 or more online lenders, 340 nondepository CDFIs, 150 nondepository mortgage lenders in the multifamily market, 100 merchant cash advance providers, 700-900 factors, at least 100 government lenders, and 72 Farm Credit System institutions.

142

There may also be cooperative or nonprofit lenders as well as equipment and vehicle finance dealers originating in their own name that are not captured by the CFPB in these figures. For example, by searching Uniform Commercial Code (UCC) filings, Manasa Gopal and Philipp Schnabl identified 19 cooperative lenders that originated at least 1,500 loans over the period from 2006 to 2016. Manasa Gopal & Philipp Schnabl,

The Rise of Finance Companies and FinTech Lenders in Small Business Lending,

N.Y.U. Stern Sch. of Bus., at 18 (May 13, 2020),

https://ssrn.com/abstract=3600068.

Additionally, these figures do not include trade creditors, which are non-companies that extend credit by allowing customers a period of time in which to pay and which are much greater in number since the practice is widespread across the economy. This number has increased from 1,800 financial institutions estimated in the NPRM for two reasons related to the number of nondepository financial institutions participating in the credit market for 5+ unit residential dwellings in 2019. First, the CFPB revised its methodology for excluding depository institutions from the total number of participants active in the credit market for 5+ unit residential dwellings, as detailed below. Second, the Notice of Proposed Rulemaking total for all nondepository financial institutions active in the small business financing market included only those nondepository financial institutions participating in the credit market for 5+ unit residential dwellings that were estimated to be covered by the proposed rule rather than all those active in the market at all.

The Bureau estimates that about 300 commercial finance companies were engaged in small business lending in 2019.

143

The Bureau also estimates there to be about 30 or more online lenders that were active in the small business lending market in 2019, not including merchant cash advance providers.

144

143

See id.

By searching UCC filings, Manasa Gopal and Philipp Schnabl identified almost 300 commercial finance companies, including both independent and captive finance companies, with at least 1,500 small business loans between 2006 and 2016. This figure combines 192 independent finance companies with 95 captive finance companies. Since this estimate captures only those commercial finance companies averaging at least 150 loans per year over the 2006 to 2016 period, it may exclude smaller volume lenders and should be considered conservative.

144

Id.

Using the same methodology as for commercial finance companies, Gopal and Schnabl identified 19 fintech companies. The CFPB conservatively increases this estimate to 30 to account for rapid growth in the industry from 2016 to 2019. Since this estimate captures only those fintechs averaging at least 150 loans per year over the 2006 to 2016 period, it may exclude smaller volume lenders and should be considered conservative. On the other hand, since 2019, the COVID-19 economic shock may have led to some fintechs scaling back or exiting the small business financing market.

See, e.g.,

Ingrid Lunden,

Amex Acquires SoftBank-backed Kabbage After Tough 2020 for the SMB Lender,

TechCrunch (Aug. 17, 2020),

https://techcrunch.com/2020/08/17/amex-acquires-softbank-backed-kabbage-after-tough-2020-for-the-smb-lender/

(noting that Kabbage temporarily shut down credit lines to small businesses during April 2020 and then spun off its small business loan portfolio when it was subsequently acquired by American Express).

The Bureau estimates that 340 nondepository CDFIs were engaged in small business lending in 2019. Both depository and nondepository institutions can be CDFIs. Depository CDFIs are counted in the numbers of banks, savings associations, and credit unions engaged in small business lending. According to the CDFI Fund, 487 nondepository funds (

i.e.,

loan funds and venture capital funds) reported as CDFIs in 2019.

145

Of these, 340 institutions reported that business finance or commercial real estate finance were a primary or secondary line of business in 2019.

146

145

CDFI Fund,

CDFI Annual Certification and Data Collection Report (ACR): A Snapshot for Fiscal Year 2019,

at 8 (Oct. 2020),

https://www.cdfifund.gov/sites/cdfi/files/2021-01/ACR-Public-Report-Final-10292020-508Compliant.pdf

146

Id.

at 15-16.

The Bureau estimates that about 150 nondepository mortgage lenders participated in the credit market for 5+ unit residential dwellings in 2019.

147

In its

2019 Multifamily Lending Report,

the Mortgage Bankers Association lists annual multifamily lending volumes by institution, including a distinction for loans of under $1 million in value at origination.

148

Using the same small loan to business proxy as is used in the FFIEC Call Report, the Bureau estimates the number of nondepository mortgage lenders by counting the number of institutions that appear on this list that are not depository institutions and that extended at least two loans in 2019.

149

147

Nondepository lenders providing financing for commercial real estate transactions besides 5+ unit residential dwellings are not separately captured here but often overlap with those lenders providing financing for 5+ unit residential dwellings.

See

Com. Prop. Exec.,

Top 20 Commercial Mortgage Banking and Brokerage Firms of 2022

(Jan. 3, 2022),

https://www.commercialsearch.com/news/top-20-commercial-mortgage-banking-and-brokerage-firms-of-2022/

(listing top commercial real estate lenders and identifying sectors financed by lender).

148

See

Mortg. Bankers Ass'n,

Annual Report on Multi-Family Lending—2019,

at 9-66 (2020),

https://www.mba.org/store/products/research/general/report/2019-annual-report-on-multifamily-lending

. In the Notice of Proposed Rulemaking, the CFPB had estimated nondepository financial institutions participating in the credit market for 5+ unit residential dwellings by excluding financial institutions included in the above-cited report with the word “bank” or “credit union” in the institution name and further manually removing around ten more institutions that appeared to be depository institutions at first glance. To improve accuracy, for the Final Rule the CFPB has manually coded all 2,588 institutions in the above-cited report to exclude any institutions that are banks, savings associations, credit unions, or farm credit associations but which do not have the word “bank” or “credit union” in the institution name as recorded in the report. As a result, the total number of nondepository financial institutions active in this market fell from 270 to 150.

149

The CFPB counts institutions extending at least two loans of any size in order to estimate institutions extending at least one small loan, based on the assumption that some 50 percent of these loans may have been for values greater than $1 million.

Data from UCC filings indicates that about 100 institutions were active in the market for providing merchant cash advances to small businesses in 2021.

150

deBanked,

UCC-1 and UCC-3 Filings by Merchant Cash Advance Companies & Alternative Business Lenders, https://debanked.com/merchant-cash-advance-resource/merchant-cash-advance-ucc/

(last visited Mar. 20, 2023).

The Bureau estimates the number of factors in 2019 to be between 700-900 and assumes that most factors were providing financing to small business.

151

See

Secured Fin. Found.,

2019 Secured Finance: Market Sizing & Impact Study Extract Report,

at 15 (June 2019),

https://www.sfnet.com/docs/default-source/data-files-and-research-documents/sfnet_market_sizing___impact_study_extract_f.pdf?sfvrsn=72eb7333_2

(estimating the number of factors at between 700 and 900).

Finally, many government agencies and government-sponsored enterprises provide or facilitate a significant proportion of small business credit. As the flagship government lender, the SBA managed in 2019 a portfolio of over $140 billion in loans to small businesses, to which it added over $1 trillion in loans extended as part of the COVID-19 emergency lending programs. (As noted above, over $740 billion in Paycheck Protection Program loans had been forgiven as of July 2022, bringing SBA outstanding loan balances back down.

152

) Across Federal, State, and municipal governments, the Bureau estimates that there are likely over 100 government small business lending programs.

153

Additionally, the Farm Credit System reports that, as of December 2019, the Farm Credit System contained a total of 72 banks and associations.

154

All of these Farm Credit System institutions were engaged in lending to small farms in 2019.

155

152

Pandemic Response Accountability Comm.,

Paycheck Protection Program: Loan Forgiveness by the Numbers

(July 2022),

https://www.pandemicoversight.gov/media/file/ppp-loan-forgiveness-fact-sheet-july-2022-updatepdf

153

In addition to several Federal small business lending programs, States and major municipalities also often have one or more programs of their own. One State and one municipal program in each State would already total 100 government lending programs across Federal, State, and municipal governments.

154

Fed. Farm Credit Banks Funding Corp.,

Farm Credit 2019 Annual Information Statement of the Farm Credit System,

at 7 (Feb. 28, 2020),

https://www.farmcreditfunding.com/ffcb_live/serve/public/pressre/finin/report.pdf?assetId=395570

. The CFPB notes that Farm Credit System banks do not report FFIEC Call Reports and are thus not counted in the number of banks and savings associations discussed above.

155

Calculated from Young, Beginning, and Small Farmer Report data accessed on June 17, 2022,

https://reports.fca.gov/CRS/search-institution.aspx.

E. Challenges for Women-Owned, Minority-Owned, and LGBTQI+-Owned Small Businesses

Within the context of small business financing, women-owned, minority-owned, and LGBTQI+-owned small businesses often face relatively challenges than their counterparts to obtain credit. In line with congressional purpose, information collected about these businesses may provide opportunities for community development lending, and the information collected may be particularly important to support fair lending analysis and enforcement.

Women-owned, minority-owned, and LGBTQI+-owned small businesses have smaller cash reserves on average, leaving them less able to weather credit crunches. For example, in February 2021, 39 percent of women-owned businesses had one month or less in cash reserves, compared with 29 percent of men-owned firms.

156

And in around 90 percent of majority Black and Hispanic communities, most businesses have fewer than 14 days of cash buffer, while this is true of only 35 percent of majority white communities.

157

As a result, many small businesses, especially those owned by women, minorities, and LGBTQI+ individuals, may have a greater need for financing in general and particularly during economic downturns.

156

Eric Groves,

Cash Strapped SMBs, While 75% Of PPP Is Still Available,

Alignable (Feb. 9, 2021),

https://www.alignable.com/forum/alignable-road-to-recovery-report-february-2021

157

JPMorgan Chase Inst.,

Place Matters: Small Business Financial Health in Urban Communities,

at 5 (Sept. 2019),

https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/institute/pdf/institute-place-matters.pdf

See also

Diana Farrell

et al.,

JP Morgan Chase Inst.,

Small Business Owner Race, Liquidity, and Survival,

at 5 (July 2020),

https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/institute/pdf/institute-small-business-owner-race-report.pdf

(finding in a sample of firms founded in 2013 and 2014 that after one year in business white-owned firms had on average 19 cash buffer days compared to 14 for Hispanic-owned firms and 12 for Black-owned firms).

Policy responses to support small businesses in economic downturns may struggle to reach small businesses owned by women, minorities, and LGBTQI+ individuals. For example, although LGBTQI+-owned small businesses were more likely to apply for Paycheck Protection Program loans, they were less likely to receive all of the funds that they applied for, and more likely to have gotten none of the funding they applied for.

158

Spencer Watson

et al., LGBTQ-Owned Small Businesses in 2021,

Ctr. for LGBTQ Econ. Advancement & Rsch. and Movement Advancement Project, at 8 (July 2022),

https://www.lgbtmap.org/file/LGBTQ-Small-Businesses-in-2021.pdf

(using data from the Federal Reserve's Small Business Credit Survey, which began collecting demographic data on LGBTQ small business ownership in 2021).

Established relationships between applicants and lenders were often critical to approvals in the earliest period of Paycheck Protection Program underwriting;

159

many minority-owned

160

and women-owned

161

businesses did not have such relationships. Minority borrowers with limited English proficiency may also have faced difficulties overcoming language barriers,

162

particularly during the first round of the Paycheck Protection Program in April 2020 when application materials had not yet been translated from English.

163

Further, many minority-owned and women-owned firms are sole proprietorships and independent contractors, both of which received delayed access to Paycheck Protection Program loans.

164

159

Sara Savat,

Who you know matters, even when applying for PPP loans,

The Source, Newsroom, Wash. Univ. in St. Louis (Feb. 15, 2021),

https://source.wustl.edu/2021/02/who-you-know-matters-even-when-applying-for-ppp-loans/

(previous lender relationship increased likelihood of obtaining a Paycheck Protection Program loan by 57 percent).

See generally

86 FR 7271, 7280 (Jan. 27, 2021) (noting that many lenders restricted access to Paycheck Protection Program loans to existing customers, which may run a risk of violating ECOA and Regulation B).

160

Claire Kramer Mills, Fed. Rsrv. Bank of N.Y.,

Double Jeopardy: COVID-19's Concentrated Health and Wealth Effects in Black Communities,

at 6 (Aug. 2020),

https://www.newyorkfed.org/medialibrary/media/smallbusiness/DoubleJeopardy_COVID19andBlackOwnedBusinesses

(arguing that a lack of strong banking relationships among Black-owned firms may have led to relatively lower rates of access to Paycheck Protection Program loans for such firms); Fed. Rsrv. Banks,

Small Business Credit Survey: 2021 Report on Firms Owned by People of Color,

at ii (Apr. 15, 2021),

https://www.fedsmallbusiness.org/survey/2021/2021-report-on-firms-owned-by-people-of-color

(Small Business Credit Survey of Firms Owned by People of Color) (finding that “firms owned by people of color tend to have weaker banking relationships”).

161

Cf.

Mariel Padilla,

`I feel like I'm drowning': Women Business Owners Keep Hitting New Barriers to Federal Loan Aid,

19th (Apr. 23, 2021),

https://19thnews.org/2021/04/women-small-businesses-loan/

(stating that historically higher rates of loan denials for women of color than for white men result in less established banking relationships and thereby reduced access to Federal support disbursed through banks).

162

See

Emily Ryder Perlmeter, Fed. Rsrv. Bank of Dallas,

How PPP Loans Eluded Small Businesses of Color

(Nov. 29, 2021),

https://www.dallasfed.org/cd/communities/2021/1129

(detailing language barriers among small business owners of color seeking Paycheck Protection Program loans, particularly Hispanic and Asian owners who were not fluent in English).

163

See

Press Release, Rep. Judy Chu,

House Dems Urge SBA to Translate Resources into 10 Most Common Languages

(Apr. 9, 2020),

https://chu.house.gov/media-center/press-releases/house-dems-urge-sba-translate-resources-10-most-common-languages

164

Greg Iacurci,

Coronavirus loan program delayed for independent contractors and self-employed workers,

CNBC (Apr. 3, 2020),

https://www.cnbc.com/2020/04/03/delays-in-sba-loans-for-independent-contractors-self-employed-workers.html;

see also Mariel Padilla, `I feel like I'm drowning': Women Business Owners Keep Hitting New Barriers to Federal Loan Aid, 19th (Apr. 23, 2021),

https://19thnews.org/2021/04/women-small-businesses-loan/

(stating that non-employer businesses affected by restrictions on sole proprietor and independent contractor access to Paycheck Protection Program loans are disproportionately owned by women and minorities).

Applicants whose owners belong to protected categories may have received different program outcomes when applying for Paycheck Protection Program loans, although limitations in demographic information for Paycheck Protection Program loans have hindered fair lending analyses.

165

Even for such firms that did obtaining Paycheck Protection Program loans, they may have faced different outcomes with respect to loan forgiveness.

166

165

Rocio Sanchez-Moyano, Fed. Rsrv. Bank of S.F.,

Paycheck Protection Program Lending in the Twelfth Federal Reserve District

(Mar. 3, 2021),

https://www.frbsf.org/community-development/publications/community-development-research-briefs/2021/february/ppp-lending-12th-district/

(citing matched-pair audit studies that found discouragement and provision of incomplete information for minority business owners seeking Paycheck Protection Program loans); 86 FR 7271, 7280 (Jan. 27, 2021) (noting that facially neutral Paycheck Protection Program policies such as limiting loans to businesses with pre-existing relationships may run a risk of violating ECOA and Regulation B due to a disproportionate impact on a prohibited basis).

166

For example, Black-owned firms applied to fintechs for Paycheck Protection Program loans at a high rate and certain fintechs or banks that partnered with fintechs have also had a high rate of unforgiven Paycheck Protection Program loans.

See

Max Reyes,

Bank Behind Fintech's Rise Reels in Billions in Pandemic's Wake,

Bloomberg (Aug. 22, 2022),

https://www.bloomberg.com/news/articles/2022-08-21/bank-behind-fintech-s-rise-reels-in-billions-in-pandemic-s-wake

(reporting that, as of July 2021, the share of unforgiven Paycheck Protection Program loans at Kabbage, a fintech, and at Cross River, a bank that partnered with fintechs, was 34 percent and 16 percent, respectively); Who Benefited from PPP Loans (showing that Black-owned firms applied to fintechs at higher rates than other firms).

As demonstrated by the impact of the COVID-19 pandemic on small businesses, small business lending data are essential to better understand the small business financing landscape to maintain and expand support for this key part of the U.S. economy.

F. The Purposes and Impact of Section 1071

The Dodd-Frank Act sets forth the Bureau's purposes and mission. It provides that a key component of the Bureau's fair lending work is to ensure fair, equitable, and nondiscriminatory access to credit for both individuals and their communities.

167

And in passing section 1071, Congress articulated two purposes for requiring the Bureau to collect data on small business credit applications and loans—to “facilitate enforcement of fair lending laws” and to “enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.”

168

Although the Dodd-Frank Act does not further explain or clarify these dual statutory purposes, other Federal laws shed light on both purposes. That is, a set of existing Federal laws form the backdrop for the use of small business lending data collected and reported pursuant to section 1071 to facilitate the enforcement of fair lending laws, and to identify business and community development needs and opportunities across the United States.

167

See

12 U.S.C. 5493(c)(2)(A) (directing the Office of Fair Lending and Equal Opportunity to provide “oversight and enforcement of Federal laws intended to ensure the fair, equitable, and nondiscriminatory access to credit for both individuals and communities that are enforced by the Bureau,” including ECOA and the Home Mortgage Disclosure Act).

168

ECOA section 704B(a).

1. Facilitating Enforcement of Fair Lending Laws

Congress intended for section 1071 to “facilitate enforcement of fair lending laws,”

169

which include ECOA, the Home Mortgage Disclosure Act of 1975 (HMDA),

170

the Fair Housing Act,

171

and other Federal and State anti-discrimination laws.

169

Id.

170

12 U.S.C. 2801

et seq.

171

42 U.S.C. 3601 through 3619.

i. Equal Credit Opportunity Act (ECOA)

ECOA, which is implemented by Regulation B, applies to all creditors. Congress first enacted ECOA in 1974 to require financial institutions and other firms engaged in the extension of credit to “make credit equally available to all creditworthy customers without regard to sex or marital status.”

172

Two years later, Congress expanded ECOA's scope to include age, race, color, religion, national origin, receipt of public assistance benefits, and exercise of rights under the Federal Consumer Credit Protection Act.

173

172

Public Law 93-495, tit. V, section 502, 88 Stat. 1500, 1521 (1974).

173

See

Equal Credit Opportunity Act Amendments of 1976, Public Law 94-239, section 701(a), 90 Stat. 251, 251 (1976).

ECOA makes it unlawful for any creditor to discriminate against any applicant with respect to any aspect of a credit transaction (1) on the basis of race, color, religion, national origin, sex (including sexual orientation, gender identity, and sex characteristics),

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marital status, or age (provided the applicant has the capacity to contract); (2) because all or part of the applicant's income derives from any public assistance program; or (3) because the applicant has in good faith exercised any right under the Federal Consumer Credit Protection Act.

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In March 2021, the CFPB issued an interpretive rule clarifying that the scope of ECOA's and Regulation B's prohibition on credit discrimination on the basis of sex encompasses discrimination based on sexual orientation and gender identity, including discrimination based on actual or perceived nonconformity with sex-based or gender-based stereotypes and discrimination based on an applicant's associations. 86 FR 14363 (Mar. 16, 2021).

See also

Press Release, CFPB,

CFPB Clarifies That Discrimination by Lenders on the Basis of Sexual Orientation and Gender Identity Is Illegal

(Mar. 9, 2021),

https://www.consumerfinance.gov/about-us/newsroom/cfpb-clarifies-discrimination-by-lenders-on-basis-of-sexual-orientation-and-gender-identity-is-illegal/

. The interpretive rule states that an example of discriminatory sex-based or gender-based stereotyping occurs if a small business lender discourages a small business owner appearing at its office from applying for a business loan and tells the prospective applicant to go home and change because, in the view of the creditor, the small business customer's attire does not accord with the customer's gender. 86 FR 14363, 14365 (Mar. 16, 2021). As discussed further in the section-by-section analysis of § 1002.102(k) and (

), regarding the definitions of LGBTQI+ individual and LGBTQI+-owned business, respectively, the CFPB interprets ECOA's and Regulation B's prohibitions on the basis of sex to also include sex characteristics, including intersex traits.

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15 U.S.C. 1601

et seq.

Multiple Federal regulators can enforce ECOA and Regulation B and apply various penalties for violations. The enforcement provisions and penalties for those who violate ECOA and Regulation B are set forth in 15 U.S.C. 1691e(b) and 12 CFR 1002.16. Violations may also result in civil money penalties, which are governed by 12 U.S.C. 5565(c)(3). The CFPB and multiple other Federal regulators have the statutory authority to bring actions to enforce the requirements of ECOA.

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These regulators have the authority to engage in research, conduct investigations, file administrative complaints, hold hearings, and adjudicate claims through the administrative enforcement process regarding ECOA. Regulators also have independent litigation authority and can file cases in Federal court alleging violations of fair lending laws under their jurisdiction. Like other Federal regulators who are assigned enforcement authority under section 704 of ECOA, the CFPB is required to refer matters to the Department of Justice (DOJ) when it has reason to believe that a creditor has engaged in a pattern or practice of lending

discrimination.

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Private parties may also bring claims under the civil enforcement provisions of ECOA, including individual and class action claims against creditors for actual and punitive damages for any violation of ECOA.

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176

These regulators include the OCC, the Board, the FDIC, the NCUA, the Surface Transportation Board, the Civil Aeronautics Board, the Secretary of Agriculture, the Farm Credit Administration, the Securities and Exchange Commission, the SBA, the Secretary of Transportation, the CFPB, and the FTC.

See

15 U.S.C. 1691c; Regulation B § 1002.16(a). Motor vehicle dealers are subject to the Board's Regulation B (12 CFR part 202); the CFPB's rules, including this rule to implement section 1071, generally do not apply to motor vehicle dealers, as defined in section 1029(f)(2) of the Dodd-Frank Act, that are predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both. 12 U.S.C. 5519.

177

See

15 U.S.C. 1691e(h).

178

15 U.S.C. 1691e(a); Regulation B § 1002.16(b)(1).

ii. Home Mortgage Disclosure Act (HMDA)

HMDA, implemented by the CFPB's Regulation C (12 CFR part 1003), requires lenders who meet certain coverage tests to report detailed information to their Federal supervisory agencies about mortgage applications and loans at the transaction level. These reported data are a valuable resource for regulators, researchers, economists, industry, and advocates assessing housing needs, public investment, and possible discrimination as well as studying and analyzing trends in the mortgage market for a variety of purposes, including general market and economic monitoring. There is potential overlap between what is required to be reported under HMDA and what is covered by section 1071 for certain mortgage applications and loans for women-owned, minority-owned, and small businesses.

A violation of HMDA and Regulation C is subject to administrative sanctions, including civil money penalties. Compliance is enforced by the CFPB, the U.S. Department of Housing and Urban Development (HUD), the FDIC, the Board, the National Credit Union Administration (NCUA), or the Office of the Comptroller of Currency (OCC). These regulators have the statutory authority to bring actions to enforce the requirements of HMDA and to engage in research, conduct investigations, file administrative complaints, hold hearings, and adjudicate claims through the administrative enforcement process regarding HMDA.

iii. Fair Housing Act

Title VIII of the Civil Rights Act of 1968, as amended (Fair Housing Act), prohibits discrimination in the sale, rental, or financing of dwellings and in other housing-related activities because of race, color, religion, sex (including sexual orientation and gender identity),

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disability,

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familial status, or national origin.

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The Fair Housing Act

182

and its implementing regulations specifically prohibit discrimination in the making of loans,

183

the purchasing of loans,

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and in setting the terms and conditions for making loans available,

185

without reference to consumers, legal entities, or the purpose of the loan being made, although these prohibitions relate exclusively to dwellings.

186

179

See

U.S. Dep't of Hous. & Urban Dev.,

Implementation of Executive Order 13988 on the Enforcement of the Fair Housing Act

(Feb. 11, 2021),

https://www.hud.gov/sites/dfiles/PA/documents/HUD_Memo_EO13988.pdf

180

The CFPB uses the term “disability” to refer to what the Fair Housing Act and its implementing regulations describe as a “handicap” because that is the preferred term.

See, e.g., Hunt

Aimco Props., L.P.,

814 F.3d 1213, 1218 n.1 (11th Cir. 2016) (noting the term disability is generally preferred over handicap).

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42 U.S.C. 3601 through 3619, 3631.

182

42 U.S.C. 3605(b) (noting that for purposes of 3605(a), a “residential real estate-related transaction” includes the making or purchasing of loans or providing other financial assistance for purchasing, constructing, improving, repairing, or maintaining a dwelling, or transactions secured by residential real estate).

183

24 CFR 100.120.

184

24 CFR 100.125.

185

24 CFR 100.130.

186

A “dwelling,” as defined by the Fair Housing Act, is any building, structure, or portion thereof which is occupied as, or designed or intended for occupancy as, a residence by one or more families, and any vacant land which is offered for sale or lease for the construction or location thereon of any such building, structure, or portion thereof. 42 U.S.C. 3602(b).

The DOJ and HUD are jointly responsible for enforcing the Fair Housing Act. The Fair Housing Act authorizes the HUD Secretary to issue a Charge of Discrimination on behalf of aggrieved persons following an investigation and a determination that reasonable cause exists to believe that a discriminatory housing practice has occurred.

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The DOJ may bring lawsuits where there is reason to believe that a person or entity is engaged in a “pattern or practice” of discrimination or where a denial of rights to a group of persons raises an issue of general public importance,

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or where a housing discrimination complaint has been investigated by HUD, HUD has issued a Charge of Discrimination, and one of the parties to the case has “elected” to go to Federal court.

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In Fair Housing Act cases, HUD and the DOJ can obtain injunctive relief, including affirmative requirements for training and policy changes, monetary damages and, in pattern or practice cases, civil penalties.

190

187

42 U.S.C. 3610(g)(1) and (2).

188

See

42 U.S.C. 3614(a).

189

42 U.S.C. 3612(o)(1).

190

See

42 U.S.C. 3612, 3614.

Upon receipt of a complaint alleging facts that may constitute a violation of the Fair Housing Act or upon receipt of information from a consumer compliance examination or other source suggesting a violation of the Fair Housing Act, Federal executive agencies forward such facts or information to HUD and, where such facts or information indicate a possible pattern or practice of discrimination in violation of the Fair Housing Act, to the DOJ.

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Private parties may also bring claims under the civil enforcement provisions of the Fair Housing Act.

192

191

59 FR 2939, 2939 (Jan. 17, 1994).

192

See

42 U.S.C. 3613.

iv. Other Fair Lending Laws

Several other Federal statutes seek to promote fair lending. The CRA affirmatively encourages institutions to help to meet the credit needs of the entire community served by each institution covered by the statute, and CRA ratings take into account lending discrimination by those institutions.

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(See part II.F.2.i below for additional discussion of the CRA.) The Americans with Disabilities Act of 1990 prohibits discrimination against persons with disabilities in the provision of goods and services, including credit servic

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