CFPB small-business data plan scares banks. Activists say it should.

The Consumer Financial Protection Bureau’s proposal to collect data on small-business loans has been over a decade in the making, but the fight over the rulemaking is just getting started.

The agency's plan unveiled Sept. 1 has sparked industry concerns that the reporting regime will lead to more fair-lending enforcement and public shaming of banks for alleged discrimination against minority-owned businesses. Bankers are also worried the CFPB's proposed criteria for which lenders report the data are too broad.

“I think this is a big fishing expedition looking for a needle in a haystack,” said Rose Oswald Poels, president and CEO of the Wisconsin Bankers Association. “If the purpose is to find if there are bad actors out there from a discriminatory standpoint, I don't think the solution is this massive new reporting requirement that everybody has to engage in.”

Community advocacy groups, meanwhile, say they are already planning to use the data to publicize widely which banks are doing a poor job of lending to Black- and Hispanic-owned small businesses.

“When the small-business loan data comes out and everyone sees the low level of lending [to minority communities], it’s going to be a train wreck,” said Al Piña, chairman of the Florida Minority Community Reinvestment Coalition.

The CFPB proposal would require any bank or fintech lender that originates 25 or more small-business loans a year to submit data the race, sex and ethnicity of the principal business owners, as well as which applicants are denied credit. Many lenders and even some governmental entities that have never heard of the CFPB would be subject. A final rule is expected to be published in mid-2023.

The rulemaking was required by the 2010 Dodd-Frank Act, but the drafting of the proposal proceeded at a snail's pace for many years. The Dodd-Frank provision was modeled after the Home Mortgage Disclosure Act, which requires similar data to identify redlining patterns in home lending.

But banks are generally worried that there will not be sufficient protections on how the small-business data is used, and that the new reporting requirements will come as the CFPB ramps up fair-lending enforcement after a dearth of actions on redlining and other discriminatory practices during the Trump administration.

“How is the government going to use the data and also make sure it’s not misused?” said Ed Barry, CEO of the $2.1 billion-asset Capital Bank in Rockville, Maryland, which lends primarily to small businesses in the Washington, D.C., area. “It's just a wealth of opportunity for the data to be abused to go after banks.”

The proposal comes against the backdrop of banks and fintechs having made nearly $800 billion in small- business loans during the pandemic. But amid the Biden administration's broader push for racial equity, acting CFPB Director Dave Uejio has taken a tough stance on issues related to lending discrimination.

Uejio has focused on reports of banks prioritizing applications from preexisting customers for the Small Business Administration's Paycheck Protection Program, saying such decisions had a "disproportionate negative impact" on minority-owned businesses.

Research released in September by the Brookings Institution found that Black business owners were more likely to be denied PPP loans, and that businesses in majority-minority neighborhoods had to wait longer on longer. Businesses with employees in white neighborhoods waited 24 days, compared with 31 days for businesses in majority-Black neighborhoods.

“It is immensely important to get a handle on whether underserved communities and minority-owned small businesses are getting reasonably priced credit or not,” said Josh Silver, senior advisor for policy at the National Community Reinvestment Coalition, who has been advocating for the data collection for 20 years.

Congress mandated that the CFPB collect data about small-business lending in Section 1071 of Dodd-Frank to “facilitate enforcement of fair lending laws and to help identify business and community development needs.”

Consumer groups said they already are planning a robust response to publicize the data widely on websites and in social media.

“The numbers are going to be terrible," said Piña. "It will be a tsunami that will create an immediate impact on access to capital.”

Silver agreed.

“The data and public accountability is critically important so we know which lending institutions are doing a good job and which need to step up,” he said.

But bankers say the rule will be costly and painful. Some questioned how fair-lending laws would be applied to small-business borrowers. They noted HMDA reporting is linked with a clearer set of statutes related to redlining in the housing sphere.

“Unlike HMDA, where there are very clear fair-lending requirements, it is less clear what the law and regulatory doctrine is around fair lending to small businesses,” said Joe Thomas, president and CEO of the $837 million-asset Freedom Bank of Virginia in Fairfax. “It's important that there are guidelines around how fair lending to small businesses will be evaluated as an important part of the rulemaking.”

The rulemaking is so contentious that the bureau dragged its feet for more than a decade and ultimately was forced to issue a proposal only after being sued in 2019 by the California Reinvestment Coalition.

“An overarching concern with this new rule is that all of this new data will be used for fair-lending supervision and enforcement by the government, as well as for litigation by the public,” said Richard Horn, co-managing partner at the law firm Garris Horn and a former CFPB senior counsel and special advisor.

Bankers are expected to ask the CFPB during the 90-day comment period for broad exemptions for small banks. Currently the proposed rule covers any financial institution that originates 25 or more small-business loans a year. An outline of the plan released last year by then-CFPB Director Kathy Kraninger considered exempting lenders with under $200 million of assets.

"Why bother with an exemption at all if they are going to set the bar that ridiculously low?" Camden Fine, president and CEO of Calvert Advisors, said of the current proposed 25-loan threshold.

Fine, a former head of the Independent Community Bankers of America, said Kraninger's alternative approach "was better, but even that is very low by Dodd-Frank Act standards."

"Community banks are the nation’s backbone when it comes to small business lending," he said. "Is the administration trying to throttle small-business lending by setting such an absurdly low exemption threshold?

Consumer advocates had urged the CFPB to be consistent with the 2015 HMDA rule, which gave an exemption to lenders that originate fewer than 25 loans a year. But last year the Trump administration, citing regulatory burdens on small banks, raised the HMDA threshold to 100 loans.

Noah W. Wilcox, CEO of the $282.5 million-asset Grand Rapids State Bank in Minnesota, wrote on Twitter: “The CFPB proposed exemption from 1071 at 25 or fewer loans is a complete insult to the community banks that lead the nation in small business lending. We need a robust exemption and these businesses deserve it!”

Many bankers said small-business lending is a vehicle for solving income inequality and systemic racism. But they said the data collection could result in a lending pullback because of the high cost of compliance.

“It will be another big burden, another example of increasing compliance costs to solve a policy goal which may or may not be solvable through this,” said Barry at Capital Bank. He said he would need to hire more staff and potentially switch technology vendors to comply.

There also is the question of how the CFPB will use the data to compare small-business loans across thousands of very different financial institutions and small-business credit products. Bank lawyers say there are plenty of good reasons why loan applicants are denied even if those reasons are unclear from the data. Loan officers use discretion and subjectivity in making decisions about which small-business loans to approve.

“Each loan is like a work of art. It has to be underwritten based upon these idiosyncratic aspects of a small business: what industry it is in, what geography, what level of capital, what stage of growth,” said Thomas. “It is a complicated process to make an objective credit decision to help a small-business owner succeed or gain access to capital.”