CFPB Hears Growing Calls to Draft Business Loan Data Rule

WASHINGTON — As banks await an expansion of data they must give regulators to capture mortgage lending patterns, pressure is building on the Consumer Financial Protection Bureau to advance similar requirements for small-business lending.

The Dodd-Frank Act requires lenders to submit data on credit applications made by small as well as minority- and women-owned businesses. Just like similar reporting mandated under the Home Mortgage Disclosure Act, the new requirements are meant partly to assess whether lending patterns reflect fair and equitable treatment or possibly discriminatory practices.

But the business lending data requirements — which fell to the CFPB to implement — are one of the increasingly rare financial reform provisions that have not even been proposed yet, prompting calls on the agency to act, most recently from 84 House Democrats. Observers said the delay likely stems from a CFPB workload full of other more pressing matters, and a desire not to rush a new rule that could have unintended consequences.

"The key is implementing it in a way that doesn't discourage small business lending and that's why the CFPB is being careful," said Wayne Abernathy, an executive vice president of the American Bankers Association. "If they're not careful, you don't want the lending to be all wrapped up in red tape and for the lender to be focused on the regulatory risk instead of making good loans."

In an Aug. 21 letter to CFPB Director Richard Cordray, Reps. Donald Payne, D-N.J., Chris Van Hollen, D-Md., and scores of other lawmakers said "now is the time to initiate rulemaking" on small-business lending reporting.

"Transparency in small business lending data is the key to understanding the credit needs of women-owned and minority-owned small businesses," they wrote. "Public and private entities are collecting data on various aspects of small business lending. However, these groups offer a fragmentary and incomplete picture of lending in the small business marketplace."

Dodd-Frank essentially created a regime for small-business lending that is just like HMDA for mortgages. Adding language to the Equal Credit Opportunity Act, the new requirements include that lenders compile records on loan applications by women- and minority-owned, and small businesses. Required data include loan application date; the type of loan and amount of credit sought; the business's census tract and annual revenues; what action was taken on the application; and the race, sex and ethnicity of the principal owners.

"HMDA data has helped the community groups, the lenders and the media understand the pattern and practice of mortgage lending in this country," said John Taylor, the president and chief executive officer of the National Community Reinvestment Coalition. "The same cannot be said when it comes to small business lending."

But industry lawyers said the new data-gathering effort will not be easy to implement.

"This is a going to be a major undertaking to be able to collect the data, and there's always concern about how the data is going to be used," said Alan Kaplinsky, a partner at Ballard Spahr.

Yet the new reporting standards have fallen behind a slew of other CFPB-related matters that have taken higher priority. Those include a rule expanding the mortgage disclosure requirements under HMDA, which was also required by Dodd-Frank and the CFPB proposed last year. A final HMDA rule is expected sometime in the fall.

In fact, the agency's only formal policy on the small-business lending data rule writing was 2011 guidance — hailed by the industry — clarifying that the Dodd-Frank provision would not be effective until the CFPB had issued a rule.

The latest Democratic letter was just one in a series after earlier correspondence between lawmakers and the bureau last month on the issue. In March, the National Women's Business Council — a statutorily-created panel of women business leaders chaired by a presidential appointee — also urged the agency to implement the new reporting framework.

At a House hearing in March, Cordray indicated a proposal on small business reporting was not likely to come out this year, and said the agency had made the decision to finish the HMDA rule first.

"We have a process here that I think makes sense, which is to complete the HMDA [rule], which is one of the required tasks for us, [and] then move to this small-business data" regulation "and have it built together so that the data collection is being done in the most efficient manner," he said.

But industry representatives said important issues related to the small-business reporting format may also be slowing the agency down.

"They've got a lot on their plate" but "there are [also] some more fundamental questions that need to be answered before they can really get themselves in a position to write the reg," said Carl Pry, a managing director at Treliant Risk Advisors.

A key sticking point, Pry said, will be how the CFPB defines which loans require added data. While there are well-established definitions for women- and minority-owned businesses, he noted, it is unclear which definition the CFPB will use for small business. Dodd-Frank suggested the definition used by the Small Business Administration should apply, Pry said. "But those are not easy to decode," he said.

"It's not like saying just that if you have revenues under $1 million, you're a … [small business]. There are complicated classifications based on what type of business you're in, how many employees you have, what your revenue is. If you're requiring every bank to become an SBA expert, that gets to become pretty unworkable."

Pry said the potential for commercial lenders to be subject to fair-lending enforcement based on the data will also be a significant adjustment.

"It's a huge concern because traditionally commercial lending has not been the focus of any sort of fair-lending scrutiny," he said. "You'll find instances of it, but it's not a major deal. Now it's going to be a major deal because there will be yet another set of publicly available data out there."

But the NCRC's Taylor said added transparency is needed to determine whether small business lenders are treating borrowers fairly.

"Once there is sunshine on the types of small businesses that are able to get loans, good things will happen," he said. "There will be a spectrum of lenders, some of whom are doing a terrific job of making small business loans available to women and to people of color, and some who are doing a horrible job."

The ABA's Abernathy agreed that the reporting rule has the potential to be a positive, if written carefully.

"If you have a data-gathering exercise that looks at all the pieces without becoming a reporting nightmare, we think banks will come out looking very good," he said. "For that reason, we don't want the bureau to rush into this. We want to make sure they're getting it right because at the end of the day the goal is to facilitate small business lending, not make it harder."