Good afternoon,

We are tracking our reportable loans for the last quarter of 2023 to annualize the number of reportable transactions for the year. The very first loan we had close this month is to two individual business owners for business purposes. Since the loan is to individuals, am I correct in thinking this would not be reportable?

https://www.consumerfinance.gov/com...ness-lending-rule-faqs/#small-businesses

See Q&A #2 under Small Business

This would not be a sole proprietorship situation. These are partners in a business borrowing as individuals.

Then refer to question 1 under Small Business, which would also apply to a sole proprietor. Question 1 mentions partnerships.

This is not a loan to a partnership, just two partners as individuals for the benefit of the partnership. Question 1 doesn't really answer this for me. It makes me think this is not reportable.

I currently have a loan to two individual members of an LLC with the LLC as the guarantor. I am thinking this is a similar situation and would not be reportable since the LLC is not the borrower.

I would love to hear thoughts on this particular situation. I have read a lot and need assistance deciphering what I am reading.

Yes, an individual or sole proprietorship can be a small business pursuant to the small business lending rule. This is true regardless of whether the individual has formed an entity under applicable law to operate the business, whether the individual is doing business in the individual’s own name, or whether the individual is doing business using a trade name or other name (such as a DBA). See 13 CFR § 121.105(b).

IMHO you have a covered transaction.

A to Q 1 under Covered Credit Transactions

A covered credit transaction is an extension of business credit (as that term is defined in 12 CFR § 1002.2(g)) that is not excluded pursuant to the small business lending rule. 12 CFR §§ 1002.102(d) and 1002.104.

For this purpose, “business credit” includes credit used primarily for an agricultural purpose as well as credit primarily used for a business or commercial purpose. Thus, covered credit transactions include loans, lines of credit, credit cards, merchant cash advances, and other credit products used primarily for agricultural, business, or commercial purposes. See Comment 104(a)-1. However, factoring, leases, and consumer-designated credit are not covered credit transactions because they do not satisfy the definition of business credit. Comments 104(b)-1 through -3.

1002.102
(d)Business credit shall have the same meaning as in § 1002.2(g)

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).

I agree with Dan. With the way "small business" is defined I do not believe you will ever not have a covered transaction based on the structure of the borrower or borrowing entity, as effectively any borrower or borrowing entity will meet the definition.

Thank you both.

I spoke with a CFPB attorney 2 days ago regarding this exact question. She acknowledged the rule is ambiguous about situations where you lend money to a person who is not acting as a proprietorship and who wants the money to invest as equity in a partnership. She said whichever interpretation you take be consistent about it and document your reasoning in writing. The Bureau is looking at the questions they are getting and it will affect how they may issue interpretations in the coming years after the Rule is implemented.

I think there's a significant difference between owning and operating a business and investing in that business.