Who Is Covered?
The new requirements apply to “financial institutions,” as that
term is defined in the ECOA amendments. It’s a broader definition
than is found in the Community Reinvestment Act, for instance,
and suffice it to say that all banks are included, as “engages in
financial activity” is the key determinant for coverage.
However, the CFPB is given the authority (“by rule or order”)
to adopt exemptions to any class of financial institutions, “as the
Bureau deems necessary or appropriate to carry out the purpose
of this section.” 10 It remains to be seen whether the bureau will
enact exemptions similar to those in HMDA (that are dependent
upon a bank’s asset size, number of loans made, etc.).
For What Applications and Loans Must Information
be Collected and Submitted?
Lenders will be required to collect and report data for “any application to a financial institution for credit for women-owned,
minority-owned, or small business.” 11 What precisely is covered here?
Application. The rule requires reporting of applications, not
just loans, as HMDA does. There is no definition of “application”
in the Dodd-Frank Act’s ECOA amendments, but because this
will be part of Reg. B, we can look there: “Application means an
oral or written request for an extension of credit that is made in
accordance with procedures used by a creditor for the type of
credit requested.” 12
Commercial lenders are notorious for not having specific ap-
plication procedures, however. So what will constitute a reportable
application? The commentary provides some assistance:
The term “procedures” refers to the actual practices fol-
lowed by a creditor for making credit decisions as well as
its stated application procedures. For example, if a credi-
tor’s stated policy is to require all applications to be in
writing on the creditor’s application form, but the creditor
also makes credit decisions based on oral requests, the
creditor’s procedures are to accept both oral and written
Many times commercial loan decisions are initiated by oral
requests, and those clearly constitute applications under the regulation. Compliance officers should be sure to cast a wide net to catch
all reportable instances of credit requests for covered loan types.
Small business loan. This is defined simply as “a loan made
to a small business.” 14 Well, thanks a lot—tell me what a “small
business” is, then. According to the ECOA amendments, “small
business” means the same as the term “small business concern”
in the Small Business Act.
Generally, to qualify as a “small business concern” to the Small
Business Administration (SBA), a business (including its affiliates) cannot have more than 500 employees for manufacturing
and mining industries or more than $7 million in average annual
receipts for nonmanufacturing industries. These are not absolutes,
however, as there are many exceptions. It will be the job of the
CFPB to clearly delineate what will constitute a covered small
business under the regulation.
“Loan” includes both closed-end loans and open-end lines
and woman-owned business.
These terms have the same requirements: more than 50 percent
of the ownership or control of the business is held
by one or more minority individuals or women,
or more than 50 percent of the net profit or loss
accrues to one or more minority individuals
“Minority” includes “any Black American,
Native American, Hispanic American, or
Asian American.” 15
Note that these two definitions are not dependent on the size of the business. A loan can be to
a minority- or woman-owned business, even
though the business isn’t a “small
business.” In other words, loans to
minority- or woman-owned large
businesses are included.
lenders will be required to collect and
report data for “any application to a financial
institution for credit for women-owned,
minority-owned, or small business.”
It will be critical to identify which businesses qualify under
these definitions. How to do this? Simple—ask the applicant questions. Fortunately the statute calls for the CFPB to develop and
provide assistance to banks in determining whether an applicant
is a small business or minority- or woman-owned business. But
in any case, this will call for procedures to be developed for your
commercial loan officers.
The requirement is simple: “the financial institution shall … inquire whether the business is a woman-owned, minority-owned,
or small business.” 16 This is the case whether the application is
received in person, over the phone, by mail, electronically, or
otherwise. It also does not matter whether the application was
received in response to a solicitation from the bank.
Due to the definitions being drafted the way they are, it will
be necessary to ask every commercial loan applicant about the
status of the business (because, again, even large businesses could
be covered if minority- or woman-owned). What happens if the
applicant doesn’t know? Because there is no verification requirement in the statute, presumably your commercial loan officers
can take applicants at their word, but of course the CFPB could
add some additional requirements when it drafts the regulations.
An applicant may refuse to answer the question with no adverse consequences to the credit application. Responses must be