Court of Appeals for the Fifth Circuit. This rule, finalized in May 2023 under Regulation B, implements Section 1071 of the Dodd-Frank Act and requires lenders to collect and report detailed demographic and loan application data from small business credit applicants.
Background on the Rule
- The rule mandates covered financial institutions to collect and report data such as loan purpose, amount, pricing, business size, industry classification, and ownership demographics.
- Certain demographic data must be firewalled from credit decisionmakers, and disclosure of protected information is strictly limited.
- The rule applies to institutions that originated at least 100 covered credit transactions for small businesses in each of the two preceding calendar years.
Reason for the Enforcement Pause
The CFPB stated that enforcing the rule only against institutions outside the Fifth Circuit-while others remain protected by the court-ordered stay-would result in inconsistent and inequitable regulatory treatment. To avoid this unfairness, the Bureau is deprioritizing enforcement and supervision for all institutions not covered by the stay, effectively pausing enforcement for these entities.
CFPB’s Focus Going Forward
The Bureau emphasized it will redirect its enforcement and supervision resources toward “pressing threats to consumers,” with a particular focus on servicemen, veterans, and small businesses. The CFPB also noted that, even without resource constraints, it would have taken this step to ensure fair and consistent regulatory treatment as litigation over the rule continues.
Litigation and Ongoing Developments
- The stay was originally granted by the Fifth Circuit Court of Appeals in a lawsuit brought by banking associations and other industry groups, which paused enforcement and extended compliance deadlines for their members.
- The CFPB’s decision is part of a broader trend to scale back certain regulatory priorities amid ongoing legal challenges and changes in agency leadership.
- The Bureau has indicated it looks forward to resolving the regulation’s status to ensure uniform treatment for all affected entities.
Impact on Alternative Lenders
The enforcement pause provides temporary relief but creates uncertainty about whether to invest in compliance or risk non-compliance if the rule is reinstated. This uncertainty poses a major operational challenge that is often overlooked.
With the enforcement pause, lenders are left unsure whether to continue investing in compliance systems or risk falling behind if the rule is revived. This creates a “regulatory limbo” where some have already spent resources to prepare, while others have paused efforts, leading to competitive imbalances.
- Compliance Timelines: Larger institutions (including many leading fintechs) were required to comply as early as July 18, 2025, with smaller lenders facing later deadlines. The pause has disrupted these timelines, causing confusion about when and how to implement compliance measures.
- Technology Providers’ Response: Vendors like Finastra have launched dedicated compliance solutions, signaling strong demand from alternative lenders seeking to automate and streamline the data collection process. This reflects the scale and complexity of the operational changes required.
- Market Impact: Some alternative lenders have reported that the uncertainty is hampering their ability to plan product launches or scale lending operations, as they are unsure what compliance environment they will face in the coming months.
Competitive Implications
The pause creates competitive imbalances, disadvantaging lenders who invested in compliance systems compared to those who delayed. The rule's phased implementation favored larger lenders, and the enforcement pause complicates the landscape, particularly for agile alt lenders.
The CFPB's small business lending rule has led to a bifurcated landscape, leaving proactive lenders facing strategic dilemmas.
Adaptation Strategies
The CFPB’s enforcement pause has real consequences for alternative lenders, competitive dynamics, and small business borrowers. The lack of coverage on these dimensions leaves industry participants and the public without a full understanding of what’s at stake as the rule’s future remains uncertain
Our Opinion
This situation presents a rare strategic inflection point for alternative lenders. The enforcement pause puts lenders in "regulatory limbo" - they're unsure whether to continue investing in compliance systems or risk falling behind if the rule is revived.
They must decide whether to continue collecting demographic data, impacting borrower experience and market differentiation.
The rule affects lenders with at least 100 small business credit transactions in the past two years. The enforcement pause changes compliance requirements, affecting operational costs, data systems, and lending processes.
It's important to keep track of how operations and strategies are affected during this time of uncertain regulations.
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