loans, and they’ll tell you how complicated the determination of
what a small business is can be. Generally to qualify as a “small
business concern” to the SBA, there are limitations on the number
of employees and average annual receipts, and they differ depending on the type of industry. There are a number of exceptions.
Turning all commercial lenders (and compliance personnel) into
SBA experts would be difficult.
Many bankers have requested the Bureau follow the small business definition in the Community Reinvestment Act (CRA), or
perhaps make it flexible depending on the institution’s practices.
There are banks that have undergone fair lending examinations
on small business lending, and for the most part regulators have
asked the banks what they consider a small business to be.
Also note that the term “small” refers to the size of the business, not the size of the loan. This again is similar to the CRA.
Thus a large loan to small business would be covered, but a small
loan to a large business would not (unless that large business was
women- or minority-owned).
It is presently unknown what the Bureau will do, but it will be
important for it to clearly delineate what will constitute a covered
small business under the regulation.
It will therefore be critical for banks to identify which businesses, applications, and loans qualify under these definitions.
How to do this? Simple—ask the applicant questions. Fortunately
the statute calls for the Bureau to develop and provide assistance
to banks in determining whether an applicant is a small business
or minority- or women-owned business. But in any case, this
will call for procedures to be developed and/or refined for all
commercial loan officers.
Asking for the Information: Scripting
The requirement is simple: “the financial institution shall…inquire
whether the business is a women-owned, minority-owned, or small
business.” 7 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 or not the application was received
in response to a solicitation from the bank.
Subject to what the Bureau does when issuing its regulations,
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 (since again even large businesses could be covered
if minority- or women-owned). What happens if the applicant
doesn’t know? Since there is no verification requirement in the
statute, presumably your commercial loan officers can take applicants at their word, but the Bureau hopefully will clarify when
they draft the regulation.
An applicant may refuse to answer the question with no adverse consequences to the credit application. Responses must be
retained by the bank for at least three years, but this and all other
information collected as part of this requirement must be kept
separate from the application and any accompanying information so that it will not influence the credit decision in any way.
No underwriter access. The statute makes clear that bank employees having decision-making authority should not be allowed
access to the applicant’s response to the questions regarding the
type of business (or other demographic information).
But the statute also recognizes that in certain cases it may be
necessary for a decision-maker to see the information (the rule
talks about where a bank determines the person “should have
access”) or where it’s just not feasible to clearly separate it for
whatever reason. In these cases, the bank must provide notice
to the applicant that access is being allowed along with the fact
that the bank may not discriminate on the basis of the information provided.
All this will require careful scripting for commercial loan officers (who again aren’t used to regulatory requirements for applications) for virtually all commercial loans. They must know
what questions to ask, when to ask them, and where to record
the information. Again, very HMDA-like.
What Information Will be Collected and Submitted?
For a covered small business or minority- or women-owned business loan application, the statute requires the following information
be compiled by the bank:
■ ■ ■ Application number and date received;
■ ■ ■ Type and purpose of the credit being applied for;
■ ■ ■ Amount of credit or credit limit applied for and the amount
■ ■ ■ Type and date of action taken on the application;
■ ■ ■ Census tract of the applicant’s principal place of business;
■ ■ ■ Gross annual revenue of the business during its previous fiscal
year before application;
■ ■ ■ Race, sex, and ethnicity of the principal owner(s) of the business; and
■ ■ ■ Any other information the Bureau deems necessary.
Note again the wild card last point—this may not be a complete
list of data, if the Bureau believes additional information would
fulfill the purposes of the statute.
The record of required information retained by the bank may
not include any personally identifiable information of the applicant (such as name, phone number, email address, or specific
address other than census tract information). Again this requires
the records be kept separate from the application or other accompanying information.
Submission and Publicly Available Data
Submission. The statute requires annual reporting of the information to the Bureau, but the details of the submission requirement
(when, how, format, etc.) await Bureau regulation-writing.
Availability. Banks must make the information available to any
member of the public upon request, in a form the Bureau will
specify. The Bureau will also make the information available to
the public, but will use discretion to delete or modify any publicly
available data in the interest of privacy. It may also compile aggregate data for its own use (read: research and/or fair lending
analysis) and make these compilations available to the public as
well. Sound familiar?
Fair Lending Impact
This whole process sounds very HMDA-like, doesn’t it? Ask questions of applicants, record information about the application and
the applicant, submit it to a regulator, and make information