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#2283824 - 04/26/23 02:32 PM Business Loan Definition
Luv2run Offline
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Am I correct in thinking that 1071 is applicable to loans where the business is the borrower? For instance, if two borrowers were to receive a loan for business purposes while the business itself was not a borrower, am I correct in thinking this would NOT fall under 1071? It makes sense to me considering one of the main determining factors is GAR of the business.....

Forgive me as I am much more proficient in consumer lending than business lending and need to wrap my head around this whole thing.
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#2283849 - 04/26/23 05:33 PM Re: Business Loan Definition Luv2run
John Burnett Offline
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Well, sort of. But don't forget that a borrower can be a sole proprietor -- an individual who owns and operates a business. Business credit is an extension of credit primarily for business or commercial (including agricultural) purposes, except for the four categories of credit excluded in 1002.3.
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#2283855 - 04/26/23 05:53 PM Re: Business Loan Definition Luv2run
raitchjay Offline
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OK
I was looking at this earlier today......there seems to me to be sort of a disconnect going on.....they go into detail about the meaning of "small business" and "small business concern".....but where is the tie-in to "covered transaction"? I'm probably just totally missing it, but the definition of a covered transaction doesn't seem to reference the need for a "small business" or "small business concern" to be involved at all...so long as the loan is a business or ag. purpose loan.

ETA: and by that i'm asking....in the actual regulation. I've done some reading of the preamble and such, and yes, i understand that this is the "small business LAR" stuff we're talking about....but where in the regulation does it make the connection? Hope i'm being clear.
Last edited by raitchjay; 04/26/23 05:54 PM.
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#2283871 - 04/26/23 08:19 PM Re: Business Loan Definition Luv2run
Chinchilla Fan Offline
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Page 3: https://files.consumerfinance.gov/f/documents/cfpb_1071-final-rule.pdf

Covered credit transactions. Covered financial institutions are required to collect and
report data regarding covered applications from small businesses for covered credit transactions.

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#2283872 - 04/26/23 08:29 PM Re: Business Loan Definition Luv2run
Luv2run Offline
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1002.102(d) I am more confused than ever.......
Last edited by Luv2run; 04/26/23 08:56 PM.
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#2283873 - 04/26/23 08:30 PM Re: Business Loan Definition John Burnett
Luv2run Offline
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Thank you John!
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#2283963 - 04/28/23 11:14 PM Re: Business Loan Definition Luv2run
RebekahL CRCM Offline
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This is terribly confusing. We have many ag loans that are made to Joe Farmer individually. As near as I can figure, such loans will NOT be reportable under 1071, even if they are used for business purposes.

Humor me, and follow my line of thinking, please: crazy

1. The baseline requirement for 1071 data collection is stated at 1002.107(a): “A covered financial institution shall compile and maintain data regarding covered applications from small businesses…”

2. OK, so what is “small business”? 1002.106(b): “Small business has the same meaning as the term “small business concern” in 15 U.S.C. 632(a), as implemented in 13 CFR 121.101 through 121.107...”

3. OK, so what is a “small business concern” in those citations? 13 CFR 121.105(b) "A business concern may be in the legal form of an individual proprietorship, partnership, limited liability company, corporation, joint venture, association, trust or cooperative, except that where the form is a joint venture there can be no more than 49 percent participation by foreign business entities in the joint venture.”

Since this list does NOT include an individual natural person, I do not think Joe Farmer as a person can be considered a "small business concern"... as crazy as that may be.

4. Adding to the complexity: Reg B has long defined "business credit": 1002.2(g) "Business credit refers to extensions of credit primarily for business or commercial (including agricultural) purposes, but excluding extensions of credit of the types described in §§1002.3(a)–(d)."

This definition is purely purpose-driven, and would loop in Joe Farmer's loan.

5. While 1002 Subpart B references this long-standing "business credit" definition in the new definitions section 1002.102(d), the only place it applies the term is at 1002.104(a): "Covered credit transaction means an extension of business credit that is not an excluded transaction under paragraph (b) of this section." (See also page 103 of the final rule.)

Yeesh.

Putting this all together, I think one must first apply the "small business concern" definition. If the applicant falls into one of those legal forms, THEN one would report any of their "business credits" that are a "covered credit transaction".

Thoughts?
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#2283968 - 04/29/23 12:10 PM Re: Business Loan Definition Luv2run
rlcarey Online
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I have not spent a lot of time looking at the 1071 data collection rules, but I think "individual proprietorship." has a pretty broad meaning under the SBA rules. I do not believe it is referring to whether or not an individual has an assumed name certificate.
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#2283972 - 04/30/23 01:13 AM Re: Business Loan Definition Luv2run
Len S Offline
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Connecticut
Let me take a shot at this. First of all, any business listed in Part 121 of the Small Bus regulations would be a small business if its GAR <=$5 million. Covered lenders would report all covered applications from small businesses. Part 121 does include agricultural businesses. Also it would include any loan primarily for a business purpose including a proprietorship.

§ 1002.107 Compilation of reportable data.
(a) Data format and itemization. A covered financial institution shall compile and
maintain data regarding covered applications from small businesses.

So what is a covered application?

§ 1002.103 Covered applications. NOTE THIS IS NOT LIMITED TO APPS FROM SMALL BUSINESS - IMPORTANT BECAUSE IT DESIGNATES THE CREDIT TRANSACTIONS THAT MUST BE SCRUTINIZED FOR SMALL BUS APPLICANTS - THIS IS THE GROUP OF CREDIT APPLICATIONS THAT MUST BE WHITTLED DOWN TO THOSE FROM SMALL BUSINESS APPLICANTS. WHEN THE COVERED APPS FROM SMALL BUS ARE IDENTIFIED YOU CAN DETERMINE HOW MANY WERE ORIGINATED (SO YOU CAN DETERMINE IF YOU ARE QUALIFIED TO BE A COVERED LENDER IF YOU ARE NOT A COVERED LENDER) OR IF YOU ARE A COVERED LENDER YOU WOULD REPORT ALL THE APPLICATIONS FROM SMALL BUSINESSES.
(a) Covered application. Except as provided in paragraph (b) of this section, covered
application means an oral or written request for a covered credit transaction that is made in
accordance with procedures used by a financial institution for the type of credit requested.
(b) Circumstances that are not covered applications. A covered application does not
include:

(1) Reevaluation, extension, or renewal requests on an existing business credit account,
unless the request seeks additional credit amounts.
(2) Inquiries and prequalification requests.

And what is a small business?

§ 1002.106 Business and small business.
(a) Business has the same meaning as the term “business concern or concern” in 13 CFR
121.105.
(b) Small business definition—(1) Small business has the same meaning as the term
“small business concern” in 15 U.S.C. 632(a), as implemented in 13 CFR 121.101 through
121.107. Notwithstanding the size standards set forth in 13 CFR 121.201, for purposes of this
subpart, a business is a small business if its gross annual revenue, as defined in
§ 1002.107(a)(14), for its preceding fiscal year is $5 million or less.

Where it can get really confusing is the "not included" applications as identified above and "excluded transactions" which are listed in § 1002.104 "Covered credit transactions and excluded transactions" and the excluded transactions include (1) trade credit, (2) HMDA, (3) Insurance premium financing, (4) Public utilities credit, (5) Securities credit, and (6) Incidental credit. Adding to the potential confusion is that the official commentary adds 4 more types of excluded credit transactions which are not identified in the regulation, (1) factoring, (2) leases, (3) consumer credit, and (4) credit transaction purchases, purchases in a pool of credit transactions and partial interest in a credit transaction.. So there are 10 excluded transactions and 2 "not included" applications.

So it is critically important that lenders understand what is a covered application and if it is from a small business. The "covered applications" would form the pool of loans that must be scrutinized to identify those that are from small businesses. Only covered applications from small businesses are reported and only originations within covered applications from small businesses would determine if a lender is a covered institution.

It's all perfectly clear, right?!
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#2284063 - 05/02/23 08:39 PM Re: Business Loan Definition Luv2run
Luv2run Offline
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I am following all of this, but my remaining question is this:

Do we only collect and report on covered transactions that are applications from a small business concern, such as a sole proprietor, partnership, S Corp, LLC, Corporation........ with a GRA under $5 Million in the preceding calendar year? I know I am trying to over simplify things but I need to get this down to where I can understand it all.
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#2284074 - 05/03/23 12:08 PM Re: Business Loan Definition Luv2run
Len S Offline
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Connecticut
It's the primary purpose of the transaction (business purpose) for a covered transaction that is not an excluded transaction as defined in § 1002.104(b) and the credit applicant must be a small business borrower.as defined in Part 121 of the SBA regulations based on GAR <=$5 million in the preceding fiscal year.
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#2284103 - 05/03/23 06:45 PM Re: Business Loan Definition Luv2run
Luv2run Offline
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I am not seeing the phrase "small business borrower" in Part 121. Can you please provide guidance on where to find it?
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#2284226 - 05/08/23 01:49 PM Re: Business Loan Definition Luv2run
Len S Offline
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Connecticut
First,
§ 1002.107 Compilation of reportable data.
(a) Data format and itemization. A covered financial institution shall compile and
maintain data regarding covered applications from small businesses.

§ 1002.106 Business and small business.
(a) Business has the same meaning as the term “business concern or concern” in 13 CFR
121.105.
(b) Small business definition—(1) Small business has the same meaning as the term
“small business concern” in 15 U.S.C. 632(a), as implemented in 13 CFR 121.101 through
121.107. Notwithstanding the size standards set forth in 13 CFR 121.201, for purposes of this
subpart, a business is a small business if its gross annual revenue, as defined in
§ 1002.107(a)(14), for its preceding fiscal year is $5 million or less.

A business is defined in:
§121.105 How does SBA define “business concern or concern”?
(a)(1) Except for small agricultural cooperatives, a business concern eligible for assistance from SBA as a small business is a business entity organized for profit, with a place of business located in the United States, and which operates primarily within the United States or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.
(2) A small agricultural cooperative is an association (corporate or otherwise) acting pursuant to the provisions of the Agricultural Marketing Act (12 U.S.C.A. 1141j) whose size does not exceed the size standard established by SBA for other similar agricultural small business concerns. A small agricultural cooperative's member shareholders are not considered to be affiliates of the cooperative by virtue of their membership in the cooperative. However, a business concern or cooperative that does not qualify as small under this part may not be a member of a small agricultural cooperative.
(b) A business concern may be in the legal form of an individual proprietorship, partnership, limited liability company, corporation, joint venture, association, trust or cooperative, except that where the form is a joint venture there can be no more than 49 percent participation by foreign business entities in the joint venture.
(c) A firm will not be treated as a separate business concern if a substantial portion of its assets and/or liabilities are the same as those of a predecessor entity. In such a case, the annual receipts and employees of the predecessor will be taken into account in determining size.

Then, in §121.101 What are SBA size standards?
(a) SBA's size standards define whether a business entity is small and, thus, eligible for Government programs and preferences reserved for “small business” concerns. Size standards have been established for types of economic activity, or industry, generally under the North American Industry Classification System (NAICS).
(b) NAICS is described in the North American Industry Classification Manual-United States, which is available from the National Technical Information Service, 5285 Port Royal Road, Springfield, VA 22161; by calling 1(800) 553-6847 or 1(703) 605-6000; or via the Internet at http://www.ntis.gov/products/naics.aspx. The manual includes definitions for each industry, tables showing relationships between 1997 NAICS and 1987 SICs, and a comprehensive index. NAICS assigns codes to all economic activity within twenty broad sectors. Section 121.201 provides a full table of small business size standards matched to the U.S. NAICS industry codes. A full table matching a size standard with each NAICS Industry or U.S. Industry code is also published annually by SBA in the FEDERAL REGISTER
Last edited by Len S; 05/08/23 01:54 PM.
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#2285286 - 06/06/23 04:58 PM Re: Business Loan Definition Luv2run
JobSecurity Offline
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Still trying to work through who is considered a small business.

So going back to RebekahL's Joe Farmer example, so Joe comes in and wants a loan to purchase a small tractor for cutting hay for his farm, however Joe's tax returns don't indicate any income from farming is he still considered a business loan to a sole proprietorship?

SBA121.105: A business concern may be in the legal form of an individual proprietorship, partnership, limited liability company, corporation, joint venture, association, trust or cooperative, except that where the form is a joint venture there can be no more than 49 percent participation by foreign business entities in the joint venture.

The only definition I find is "A sole proprietorship is an unincorporated business that has just one owner who pays personal income tax on profits earned from the business."

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#2285295 - 06/06/23 08:51 PM Re: Business Loan Definition Luv2run
Inherent_Risk Offline
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I think farming is overcomplicating your example. If he's not in the business of X, then his purchase of something to do X is not covered. Joe Farmer isn't a farmer if he's not reporting anything about it on his taxes (assuming no tax fraud). He's also not a professional magician, so his financing of a box and saw would not be a covered transaction. If he was in the business of farming, then the tractor would be reportable. If he was a professional magician, then financing the box and saw would be reportable. I think farming is only more confusing because of ag exemptions in Reg Z, that don't really matter here. Reg B has never excluded agricultural credit.

I don't think the business concern definition is going to exclude much of anything outside of non-profit organizations.

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#2285337 - 06/07/23 07:33 PM Re: Business Loan Definition Luv2run
JobSecurity Offline
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Thanks Inherent Risk. The problem I see is we have a lot of individuals purchasing lawn equipment for a 'lawn care' business however there is no income from this 'business' on their tax returns. So I am trying to drill down to is it a business if no income from the business is on the tax returns per the general definition of a sole proprietorship? Does reporting income on taxes make it a business? Where is that defined?

I assume this will bring out a lot of tax fraud.

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#2285369 - 06/08/23 05:11 PM Re: Business Loan Definition Luv2run
Jason Ellis Offline
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In the CFPB Executive Summary it has this except: "Furthermore, factoring, leases, consumer-designated credit used for business or agricultural purposes, purchases of a credit transaction, purchases of an interest in a pool of credit transactions, and purchases of a partial interest in a credit transaction (such as through a loan participation agreement) are not covered credit transactions."

What is "consumer-designated credit used for business or agricultural purposes"? If a borrower is getting a cash-out refinance on his primary residence to purchase an investment property, is that a covered transaction?

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#2285370 - 06/08/23 05:29 PM Re: Business Loan Definition Luv2run
rlcarey Online
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Define investment property. Not all purchases of investment property is for a business purpose. I might buy a house for investment purposes, but if I am not in the real estate business, that would be a consumer purpose as a personal investment.

I think the "individuals purchasing lawn equipment for a 'lawn care' business" when there is no evidence of an actual business falls in the same boat and should be treated as consumer loans.
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#2285371 - 06/08/23 06:02 PM Re: Business Loan Definition rlcarey
Jason Ellis Offline
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In my scenario I was thinking about an individual that is not in the real estate business but purchases a house for an investment. Another example would be someone who buys a four unit property and lives in one of the units and rents out the other 3. I guess if they are not in the real estate business it is a consumer purpose as a personal investment and would not be a covered transaction.

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#2285372 - 06/08/23 06:15 PM Re: Business Loan Definition Luv2run
Inherent_Risk Offline
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That example would also almost certainly be excluded as HMDA reportable whether they were in the RE business or not (same basic question would exist on the HMDA side though).

I agree with randy on the lawncare that if they aren't in the lawn care business then it's not business credit. That is unless you aren't giving them consumer disclosures. You'll have a hard time arguing it's exempt as for business purposes for TILA and not business credit for 1071. I think people are barking up the wrong tree trying to use something in the SBA definitions to exclude anything that is business credit under Reg B (except for non-profits).

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#2285375 - 06/08/23 06:29 PM Re: Business Loan Definition Luv2run
rlcarey Online
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Well, the purchase of a four plex when one unit is going to be a primary residence is exempt from Regulation Z, but since it is a purchase, even if business purpose, it will still be HMDA reportable as Inherent Risk indicated.

HMDA: 2. Primary purpose. An institution must determine in each case if a closed-end mortgage loan or an open-end line of credit primarily is for a business or commercial purpose. If a closed-end mortgage loan or an open-end line of credit is deemed to be primarily for a business, commercial, or organizational purpose under Regulation Z, 12 CFR 1026.3(a) and its related commentary, then the loan or line of credit also is deemed to be primarily for a business or commercial purpose under § 1003.3(c)(10).

Reg Z: 5. Owner-occupied rental property. If credit is extended to acquire, improve, or maintain rental property that is or will be owner-occupied within the coming year, different rules apply:

i. Credit extended to acquire the rental property is deemed to be for business purposes if it contains more than 2 housing units.
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#2285924 - 06/26/23 02:43 PM Re: Business Loan Definition Luv2run
newyork Offline
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Loans that are solely for interim construction, that will be paid off by a permanent lender but are for construction of a 4 plex and the borrower is a natural person (not a DBA) that is not in the real estate business, but is constructing a 4plex for investment purposes one project, is this a covered transaction for the new rule?

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#2285925 - 06/26/23 03:01 PM Re: Business Loan Definition Luv2run
rlcarey Online
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There is no exclusion for temporary financing under 1071 and it is not HMDA reportable and is a business purpose, so I would say yes.
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