Lenders Brace for CFPB’s Underwriting Shakeup

The Consumer Financial Protection Bureau’s Nov. 13 proposal to revise small business lending requirements under ECOA and Regulation B marks a significant turning point for lenders navigating digital underwriting and expanding credit access.

The CFPB’s move signals that the rules shaping how lenders collect information, classify applications and explain their decisions are set for another round of updates, with implications that reach beyond small business credit.

Why ECOA and Reg B Matter for Modern Lending

ECOA is the federal law that prohibits discrimination in credit transactions. Regulation B is the operational rulebook that shapes how lenders process applications, request information, determine credit outcomes and communicate adverse actions. The full rule framework is available in the CFPB’s Regulation B rule set.

While often associated with consumer lending and credit cards, Regulation B applies equally to small business lending, merchant financing, marketplace credit arrangements and certain buy now, pay later (BNPL) structures that qualify as credit. As underwriting shifts toward digital data, cash flow analytics and automated risk models, Regulation B now sits at the center of how lenders justify decisions and support applicants through the credit lifecycle.

In just one example of how models are shifting, PYMNTS wrote that merchant-finance originations at major platforms rose sharply in Q3 while regional bank business-lending portfolios stagnated, underscoring the growing importance of embedded finance and real-time underwriting in the small-business credit ecosystem.

What the Proposed Rule Would Change

The CFPB’s Nov. 13 proposed rule, Small Business Lending Under the Equal Credit Opportunity Act (Regulation B), targets several core components of the small business credit process. The proposal would adjust coverage thresholds, refine the definition of which applications are reportable and revisit the criteria that determine whether a lender is considered a financial institution under the rule.

These changes are designed to bring greater clarity to how lenders classify small business applications in a market that has shifted toward digital-first models. The proposal also reflects concerns about the alignment between decisioning and disclosure.

As lenders rely more heavily on automated underwriting, the Bureau is pushing for clearer and more consistent explanations of adverse actions, ensuring that borrowers understand the specific factors behind credit outcomes.

The CFPB is also reviewing how certain products are categorized, including arrangements commonly used in marketplace financing. This could affect how partner-bank models, platform-based underwriting, and payment-linked credit products are treated under Regulation B, particularly if they serve small business applicants.

The proposal does not exist in isolation. It sits alongside the CFPB’s previously finalized Section 1071 data-collection requirements, which establish what lenders must report about small business credit applicants. The full rule framework is detailed in the Bureau’s 1071 rule resource center.

Both efforts move in the same direction. The CFPB wants lenders to produce clear explanations for credit decisions and consistent reporting about who receives credit, who does not and why. The proposal’s refinements to definitions and coverage indicate the Bureau is trying to ensure that the reasoning and the reporting align, particularly as digital underwriting becomes the norm.

For lenders, this means the operational redesign required under 1071 is now intertwined with the evolving expectations of Regulation B.

The proposal foreshadows a regulatory environment where lenders must be ready to defend not only the outcome of a decision but the data, logic and communication that support it.

Operational Impact

Lenders that operate in small business credit will need to assess whether the proposed definitions change their reporting obligations or their workflows for classifying applications. For institutions using automated underwriting, the proposal raises the bar for producing adverse action explanations that reflect the actual data elements used in decisioning.

Marketplace financing platforms may find themselves pulled further into the regulatory perimeter depending on how the proposal defines financial institutions and credit applications. If a platform’s activities meet the definition, its responsibilities for collecting and reporting data may expand. This could influence how these platforms structure their underwriting partnerships and how they document the reasoning behind credit decisions.

For lenders offering cash flow-based underwriting, the proposal underscores the need for transparency. Cash-flow models that rely on bank account activity and transaction patterns may require additional documentation to ensure that each adverse action explanation matches the model’s logic in a way that satisfies ECOA.

Broader Implications for Consumer Credit

Although focused on small business lending, the proposal has broader consequences. BNPL providers that offer installment products that fall under Regulation B’s definition of credit may find themselves subject to stricter standards for applicant communications and decision explanations. As BNPL models increasingly resemble traditional credit, the expectations for adverse action and applicant support are likely to converge.

Credit card issuers may also watch this proposal closely. As automated underwriting becomes more prominent in card issuance, the standards set in small business lending could influence how the CFPB assesses adverse action practices across other consumer credit categories.

The proposal is now in the formal comment phase. Once comments are reviewed, the CFPB may revise the rule before finalizing it. Given the complexity of the changes, lenders should expect phased compliance deadlines and operational adjustments.

However, the exact timeline remains fluid. Feedback volume, internal Bureau priorities and potential litigation could influence the path to a final rule.

A Bureau in Transition

The rulemaking arrives as the CFPB navigates leadership transitions and ongoing legal scrutiny and what the ultimate structure might look like, or if it shutters. That adds another layer of uncertainty to how quickly the Bureau will finalize the rule and how aggressively it will enforce it once effective.

For lenders, this means preparing for multiple outcomes. Some will delay operational changes until the rule is finalized, while others may start building toward a more transparent, data-driven compliance framework in anticipation of where Regulation B is heading.