CFPB 1071: Small business lending FAQs for covered Financial Institutions

Yes, if a financial institution meets the origination threshold for two consecutive calendar years, it is considered a covered financial institution and must comply with the small business lending rule, regardless of its presence in an MSA.

When determining if a financial institution satisfies the origination threshold, it counts the covered credit transactions it originated to small businesses in the two preceding calendar years. However, transactions that extend, renew, or amend existing ones are not counted. If multiple financial institutions are involved in the origination, only the last institution with authority over the material terms of the transaction counts it. Covered credit transactions include loans, credit cards, and other credit products used primarily for agricultural, business, or commercial purposes. Factoring, leases, and consumer-designated credit are not counted. Excluded transactions include trade credit, HMDA-reportable transactions, insurance premium financing, public utilities credit, securities credit, and incidental credit. Purchases of covered credit transactions and partial interests are also not counted. Under the small business lending rule, small businesses have gross annual revenue of $5 million or less and must be for-profit entities. Non-profit organizations and governmental entities are excluded from the definition of small business.

No, a financial institution only counts the covered credit transactions that it originated to small businesses in the previous two calendar years. Transactions originated by affiliated institutions are not required to be counted, as specified in the preamble to the small business lending rule and outlined in 12 CFR § 1002.109(a)(2). However, suppose both the financial institution and its affiliates are involved in approving a single covered credit transaction to a small business, and the financial institution has the final authority over the material terms. In that case, it must include that transaction in its count.

Yes, if the refinancing is a covered credit transaction and is originated for a small business, the financial institution must count it in its number of covered originations. Refinancing refers to a covered credit transaction that satisfies and replaces an existing account.

No, a financial institution does not need to count extensions, renewals, or other amendments when determining the number of covered credit transactions it originated for small businesses. However, it is important to note that refinancings, which are covered credit transactions originated for small businesses, must be included in the count. Additionally, according to Section 2.4.1 of the small entity compliance guide, if a small business requests an increased credit amount or a line increase on an existing account, it may be considered a reportable application for a covered financial institution.

Yes, a financial institution must count agricultural-purpose credit transactions in its number of covered originations if the transaction is extended to a small business and is not specifically excluded under the small business lending rule. However, some exclusions in the rule, such as trade credit, may apply to agricultural-purpose transactions. For instance, if a retailer allows a small farm to purchase goods or services and defer payment, it is considered trade credit and not a covered credit transaction under the rule. Nevertheless, if a financial institution other than the supplier extends agricultural purpose credit, it is not considered trade credit. Additionally, if a business intends to sell or transfer its rights as a creditor to a third party, credit extended by that business is not classified as trade credit. Moreover, transactions primarily used for agricultural purposes are not considered “covered loans” under Regulation C. They, therefore, cannot be excluded as HMDA-reportable loans under the small business lending rule, even if secured by a dwelling.

No, HMDA-reportable loans are not covered credit transactions, so they should not be counted as covered originations regardless of whether the financial institution reports the loan under HMDA/Regulation C or is subject to HMDA requirements.

Yes, financial institutions should count temporary loans, bridge loans, and other short-term loans as covered originations if they meet certain criteria:

• The loan is primarily used for business, commercial, or agricultural purposes
• The loan is extended to a small business
• The loan is not specifically excluded under the small business lending rule

Temporary and bridge loans are generally not HMDA-reportable because they are designed to be replaced by separate permanent financing extended to the same borrower at a later time, which means they do not fall under the “covered loans” category regulated by Regulation C. However, if a short-term loan is not intended to be replaced by other financings, it may be excluded from the small business lending rule as an HMDA-reportable loan if it:

• Is extended for business or commercial purposes
• Is secured by a dwelling
• Involves a home purchase, home improvement, or refinancing of a home purchase or home improvement loan

Certain short-term transactions may also qualify for other exclusions, such as the incidental or trade credit exclusion. It’s important to note that financial institutions are not required to count extensions, renewals, or other amendments when determining their number of covered originations, as highlighted in Institutional Coverage Question 6.

Yes, financial institutions must count construction loans as covered originations if certain criteria are met:

• The construction loan is primarily used for business, commercial, or agricultural purposes.
• The loan is extended to a small business.
• The loan is not specifically excluded under the small business lending rule

While some construction loans may not be HMDA-reportable under the small business lending rule, as they are intended to be replaced by separate permanent financing in the future, certain construction loans that are not meant to be replaced by other financings may be excluded from the small business lending rule if they meet the following criteria:

• The loan is extended for business or commercial purposes
• It is secured by a dwelling
• It is for a home purchase, home improvement, or refinancing of a home purchase or home improvement loan

It’s important to note that financial institutions are not required to count extensions, renewals, or other amendments when determining their number of covered originations, as highlighted in Institutional Coverage Question 6.

When determining whether to count a covered origination, a financial institution should consider the following guidelines:

• If only one financial institution made the credit decision to originate the covered credit transaction, that institution must count the resulting covered origination.
• If multiple financial institutions were involved in making the credit decision, only the last institution with authority to set the material terms of the transaction should count the covered origination.
• The last institution with authority for setting the material terms should count the covered origination, even if it chooses not to exercise that authority.

For example, suppose a small business submits an application to one financial institution that approves it and forwards it to a second institution. The second institution approves the application but modifies the credit terms. The second institution becomes responsible for counting the covered origination in that case. Even if the second institution approves the application without modifying the credit terms, it is still responsible for counting the covered origination because it has the authority to set the material terms, even if it chooses not to exercise that authority in this specific instance.

Yes, a covered credit transaction that is extended to multiple borrowers is considered a covered origination if at least one of the borrowers is a small business, and the transaction is not an extension, renewal, or other amendment of an existing transaction. Financial institutions can aggregate the gross annual revenue of affiliated co-applicants or borrowers to determine their small business status. If affiliated co-applicants’ combined gross annual revenue exceeds $5 million in the preceding fiscal year, they are not considered small businesses. However, financial institutions cannot aggregate the gross annual revenue of unaffiliated co-applicants or borrowers. An “affiliate” in this context refers to a business that controls or has the power to control another business, or where a third party controls or has the power to control both. The exercise of control is not necessary; the existence of the power to control is sufficient. In light of similar assets and/or liabilities with a predecessor entity, a business may not be regarded as an independent entity.

If a financial institution is unable to determine the number of its covered originations for 2022 and/or 2023 due to a lack of gross annual revenue information or limited access to necessary data, it is allowed to use any reasonable method to estimate its covered originations. Reasonable methods to estimate covered originations for 2022 and 2023 include:

• Asking every applicant of an approved covered credit transaction from October 1 through December 31, 2023, to self-report whether their preceding fiscal year’s gross annual revenue was $5 million or less. The financial institution can then annualize the number of covered originations during this period by quadrupling it and apply the annualized number to both calendar years 2022 and 2023 or to either 2022 or 2023.
• Assuming that every covered credit transaction originated for business customers in calendar years 2022 and/or 2023 is a covered origination.
• Alternatively, the financial institution can use any reasonable methodology that is documented in writing.

A covered credit transaction refers to an extension of business credit that falls within the scope of the small business lending rule, excluding certain types of transactions. Business credit encompasses credit primarily used for agricultural, business, or commercial purposes. Covered credit transactions include loans, lines of credit, credit cards, and merchant cash advances used primarily for these purposes. However, factoring, leases, and consumer-designated credit do not meet the definition of business credit and are not considered covered credit transactions. Additionally, the small business lending rule explicitly excludes certain business credit extensions such as trade credit, HMDA-reportable transactions, insurance premium financing, public utilities credit, securities credit, and incidental credit. It’s important to note that purchases of covered credit transactions, interests in pools of covered credit transactions, and partial interests in covered credit transactions (such as through loan participation agreements) are not considered covered credit transactions themselves.

Yes, even if the borrower uses the funds for business or agricultural purposes, an extension of consumer-designated credit remains excluded as a covered credit transaction. Consumer-designated credit refers to credit offered or extended primarily for personal, family, or household purposes. For instance, if an open-end credit account is used for both personal and business/agricultural purposes, it is not considered business credit under the small business lending rule unless the financial institution designates explicitly or intends the primary purpose of the account to be business/agricultural-related. However, financial institutions should be aware that consumer laws and regulations, such as consumer disclosure laws, may still apply to consumer-designated credit transactions.

In the context of the small business lending rule, the term “business” carries the same meaning as “business concern or concern” as defined in the Small Business Administration (SBA) regulations. Similarly, the term “small business” aligns with the definition of “small business concern” outlined in the Small Business Act and implemented in the SBA’s regulations. Generally, a small business is an organization that operates for profit and has a place of business in the United States. It primarily operates within the United States or significantly contributes to the U.S. economy through tax payments or the use of American products, materials, or labor. A small business can take various legal forms, such as an individual proprietorship, partnership, limited liability company, corporation, joint venture (with no more than 49 percent participation by foreign businesses), association, trust, or cooperative. Regardless of the size standards established in the SBA’s regulations, a business qualifies as a small business under the small business lending rule if its gross annual revenue for the preceding fiscal year is $5 million or less. Financial institutions can rely on an applicant’s representation of their gross annual revenue for determining small business status. Still, they must use updated or verified information if the applicant provides it during the application process. While financial institutions can combine gross annual revenue for affiliated applicants, they cannot aggregate the revenue of unaffiliated co-applicants to determine small business status. In this context, one business is considered an “affiliate” of another if one has control or the power to control the other or if a third-party exercises control or has the power to control both. Every five years, starting from January 1, 2025, the Consumer Financial Protection Bureau (CFPB) will adjust the gross annual revenue threshold based on changes to the Consumer Price Index for All Urban Consumers published by the United States Bureau of Labor Statistics. The adjustment will be rounded to the nearest multiple of $500,000 and take effect on the following January 1.

Yes, an individual or sole proprietorship can qualify as a small business under the small business lending rule. This rule applies regardless of whether the individual has formed an entity for the business, is operating under their name, or using a trade name or other name.

No, when calculating the gross annual revenue of a sole proprietorship for the small business lending rule, a financial institution does not include the individual’s personal income. The calculation solely focuses on the revenue earned by the for-profit business applying for the loan before deducting taxes and other expenses.

In general, yes. A new or recently started business qualifies as a small business if it didn’t operate in the preceding fiscal year and didn’t have affiliates with gross annual revenue exceeding $5 million. However, suppose a significant portion of the business’s assets and/or liabilities are the same as those of a previous entity. In that case, the annual receipts of the predecessor business may impact the determination of whether the new or recently started business is a small business. To assess a business’s small business status, a financial institution can rely on the applicant’s representations of gross annual revenue. While the institution has the option to aggregate an applicant’s gross annual revenue with its affiliates’ revenue, if a new business claims combined revenue exceeding $5 million without verification, it will not be considered a small business. However, if the institution obtains updated or verified revenue information, it must use that information to determine the business’s small business status.

It’s uncertain. Whether a single asset entity or special purpose entity is considered a small business depends on its gross annual revenue, which may or may not include the revenue of affiliated entities. Financial institutions can rely on the applicant’s declarations of gross annual revenue, with or without including affiliate revenue. The business will not be classified as small if an applicant claims combined gross annual revenue exceeding $5 million without verification. However, if the financial institution updates or verifies the revenue information, including affiliate revenue, it must reassess whether the business qualifies as a small business based on the updated or verified data.