MVA White Collar Defense, Investigations, and Regulatory Advice Blog

On June 28, the CFBP released a set of FAQ’s on the CFPB’s recently finalized Small Business Lending Rule (“Section 1071”). There are twenty-one questions covering matters under “Institutional Coverage” and “Covered Credit Transactions and Small Businesses”. The FAQs are particularly helpful when considering short-term loans, affiliation considerations, and extensions of credit to individuals that may be in-scope for Section 1071.

Short-Term Loans

Generally short-term credit to small businesses used primarily for a business, commercial, or agriculture purpose is subject to the rules and requirements of Section 1071. The FAQs provide two helpful nuances with regard to HMDA:

(1) Temporary and bridge loans that are designed to be replaced by a separate permanent financing extended to the same borrower are unlikely to be considered “Covered Loans” under HMDA, therefore making these short-term loans not HMDA-reportable and subject to Section 1071; and

(2) Short-term loans may be excluded as HMDA-reportable if they (i) are extended for business or commercial purpose, (ii) are secured by a dwelling, and (iii) are for a home purchase, are for a home improvement, or are a refinancing of a home purchase or home improvement loan. Other short-term loans may qualify for other exclusions, such as incidental credit or trade credit.

Affiliation

Section 1071 allows affiliates to provide gross revenue numbers based on the total revenue of their affiliates. The FAQs remind readers that while financial institutions can aggregate gross financial revenue for co-applicants that are affiliates, financial institutions cannot aggregate revenue from unaffiliated co-applicants. The FAQs also look at the question of affiliation for single asset entities and special purpose entities. The takeaway here is similar to the preamble of the final rule: a financial institution may rely on an applicant’s response regarding gross annual revenue, which may, but is not required to, include the revenue of its affiliates.

Extensions of Credit to Individuals

The FAQs also spend time on a few questions reminding readers that if an individual receives an extension of credit and the primary purpose of the credit is consumer related, then that extension of credit is not a covered credit transaction, even if some of its proceeds are used for business or agricultural purposes. However, if an individual (or sole proprietorship) receives an extension of credit and that extension of credit is primarily for business, agricultural or commercial purposes, then that extension of credit is a covered credit transaction. If the extension of credit to an individual is a covered credit transaction, the individual’s personal income is not used to determine the gross annual revenue. Instead, financial institutions should consider the gross annual revenue of the individual’s business.

The CFPB’s FAQs are a useful read, and we expect financial institutions will appreciate further updates to the FAQs as implementation efforts continue.