It’s been called a fishing expedition. A burden on small banks and credit unions. An example of regulatory overreach.
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Many community bankers and credit union executives said the rule would make it harder for small financial institutions to compete, forcing some to exit small-business lending entirely. Others said aspects of the data collection were at odds with how many banks do business.
Bankers
“When implemented thoughtfully and in partnership with key stakeholders, collecting more data on small-business lending has great potential to advance our shared goals of financing the American Dream for minority- and woman-owned businesses and expanding access to credit in underserved communities," wrote David Pommerehn, general counsel and senior vice president at the Consumer Bankers Association. "However, there is also an increased risk of collecting misleading or incomplete data that could negatively impact small businesses and stifle small-business lending."
In comment letter after comment letter, bankers urged the CFPB to throttle back its proposal, essentially trying to chip away at the number of institutions that would be required to report.
Trade groups seek outright exemptions for smaller institutions. The Credit Union National Association is asking for entities with $600 million of assets or less to be exempt. The Independent Community Bankers of America wants banks with assets of $1.3 billion of assets or less to be excluded.
“Community bank small-business lending is complex — it should not be commoditized and subjected to simplified, rigid analysis that would have a chilling effect on small-business lending,” wrote ICBA President and CEO Rebeca Romero Rainey. “While ICBA supports the proposal’s goal of expanding access to credit for minority-owned, women-owned and small businesses, we are concerned that its overly broad coverage will disadvantage community bank business customers.”
Many commenters expressed concern that small banks and credit unions lack the resources to hire more employees to collect and submit the data.
“The CFPB's small-business lending data collection rulemaking will likely add substantial strain on credit unions' finite resources,” wrote Andrew Oliphant, a retail training mentor at Meritrust Credit Union in Wichita, Kansas. “This strain, coupled with the regulatory challenges already facing credit unions in the business-lending space, could lead credit unions to reduce their loan offerings to small businesses, eliminate those offerings altogether or discourage credit unions from offering business loans in the future.”
The CFPB's proposal was released last year and has been a decade in the making, required by Section 1071 of the Dodd-Frank Act. The lack of a comprehensive database on small-business lending has been a major barrier to government relief efforts during the coronavirus pandemic. Some analysts have faulted the lack of small-business data as an issue in the rollout and tracking of the Small Business Administration's Paycheck Protection Program.
“It is not possible with current data to confidently answer basic questions regarding the state of small-business lending,” the CFPB said in issuing its proposal.
Financial institutions that originate at least 25 small-business loans a year for two consecutive years would have to collect and report the data. Some bankers asked that the threshold be raised to 500 or 1,000 loans a year.
A minimum of 13 specific data points would be collected. Dodd-Frank gave the CFPB the authority to expand the data even further. Consumer groups want more data added. For example, the National Community Reinvestment Coalition urged the bureau to collect the annual percentage rate on small-business loans and credit scores from small-business loan applicants.
Bankers want less data collected. Some bankers asked the CFPB to redefine a small business as an entity with no more than $1 million a year in revenue, a fraction of the proposal's current definition of $5 million in revenue.
Ann-Marie Weasel, a banker at the $1.1 billion-asset Union Bank Co. in Columbus Grove, Ohio, urged the CFPB to create even more exemptions, give lenders three years to get ready to comply with the final rule, and make other changes.
“In the end, the data collection may reduce the availability of credit and increase its cost,” Weasel
Still, the majority of letters did not directly address the elephant in the room: collecting data on small-business loans is expected to lead to more fair-lending enforcement and potentially the public shaming of banks for alleged discrimination against minority-owned businesses. Instead, bankers hewed to the theme that the proposal would add to their already onerous compliance costs.
A point of contention also came from the CFPB's proposal that lenders themselves identify the race, ethnicity and gender of the principal owners of a small business based on a person’s surname or visual clues. Bankers say that requirement puts them in a bad position.
“The financial institution should not be required to verify or use any other information or best guess based on visual observation, surname or any other basis,” wrote Kenneth A. Witbrodt, CEO of the $1.2 billion-asset Montgomery Bank in Sikeston, Missouri. “The financial institution should report the data provided, or not provided, by the applicant. If the applicant chooses not to supply information, that wish should be honored.”
Many bankers also said the CFPB’s proposal would put small banks at a competitive disadvantage. A requirement that lenders create a "firewall" to prevent employees involved in lending decisions from knowing the race, ethnicity and sex of an applicant was widely seen as unworkable.
“For most banks, the commercial loan officer collects the application information from the applicant and deals directly with the applicant throughout the lending process. As a result, the lender is already clearly aware of this information,” said Paul Reherman, a senior vice president at the $3.7 billion-asset Interbank in Oklahoma City, Oklahoma. “Implementing a firewall process to separately collect this information will create an additional burden on financial institutions and really does not accomplish the intent of the firewall. We request that this requirement be removed.”
Bankers also expressed concerns about the data being made available to the public. The CFPB has said it plans to modify or delete information to protect borrowers' privacy. The bureau also is proposing a “balancing test” that would assess the risks and benefits of public disclosure. The test would be conducted after the first year the data is received.
