One of the Consumer Financial Protection Bureau’s most important rules — requiring that lenders collect data on small-business loans — has proven to be so difficult to write that the agency had to agree under a court order to finish the rule by early next year.
A federal judge on Monday signed a
CFPB Director Rohit Chopra has portrayed himself as a staunch supporter of small businesses and has defended access to credit in
“There isn’t a lack of desire from the CFPB or the Biden administration to complete this rule, but I do think the drawn-out time period of this rule is really an indicator of just how complicated it is,” said Bill Hulse, vice president of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce. “This rulemaking could have unintended consequences of inhibiting small-business access to credit, despite its intentions otherwise.”
The bureau has dragged its feet for years in moving forward with the rule primarily because of the potential impact on millions of small businesses.
Under a CFPB proposal last year, the bureau would require any bank or fintech lender that originates 25 or more small-business loans a year to submit data on the race, sex and ethnicity of the principal business owners, as well as which applicants are denied credit. A wide range of online lenders, nonbanks and peer-to-peer lenders that are not typically subject to CFPB oversight would be subject to a final rule.
Some suggest that requiring applicants for small- business loans to fill out a standardized form would mean that lenders would no longer have as much discretion in underwriting.
“Many small-business lenders have raised concerns that the net result of the rule will be a substantial reduction in discretion they need to underwrite small-business credits,” said Jeff Naimon, a partner at Buckley.
If a lender has to assess the credibility of a borrower’s business plan, “that will make it even harder for many small businesses to obtain credit,” Naimon said.
The CFPB had previously set the deadline for the small- business data collection in its spring rulemaking agenda
Banks and small-business lenders have been in no rush for the rule to be written either. Many bankers have characterized the rule, mandated by Congress, as a
Though the data being collected from small-business applicants is similar to data that mortgage lenders collect from potential homebuyers under the Home Mortgage Disclosure Act, lenders have raised all kinds of objections to the rule. The CFPB has proposed collecting data on the race, ethnicity and sex of the small-business loan applicant, as well as pricing information, the underlying loan amount and whether the loan was approved or denied.
Still, a bigger problem is that data on loans to small businesses is
“The 1071 data collection will impose an enormous cost and compliance burden on community banks,” said Ron Haynie, a senior vice president at the Independent Community Bankers of America. “It will force a standardization of the small lending business which will result in a contraction of small-business lending.”
Small-business lending is extremely customized and much of the data such as the terms of a loan typically aren’t available until after a loan is funded.
“The complexities of reporting credit application data cannot be overstated,” said David Pommerehn, senior vice president and general counsel at the Consumer Bankers Association.
Bankers and industry experts are advocating for at least three changes to the CFPB’s
Bankers want a small business to be defined as an entity with $1 million in revenue or less, rather than up to $5 million in revenue. Industry wants a minimum of 18 months to two years to implement the rule. Finally, lenders do not want to be put in a position to guess the race of an applicant if the potential borrower declines to provide the information themselves.
Some lawmakers expressed shock that the CFPB would suggest that small-business lenders guess the race of a borrower. That contentious issue originally was raised in a small-business panel convened by then-CFPB Director Kathy Kraninger.
Kraninger released
Chopra received an earful of criticism on the plan at a House hearing in April.
“The rule would impose a new massively complex and burdensome data collection requirement that would put commercial loan officers in the unfair, uncomfortable and highly inappropriate position of guessing a borrower's race or ethnic background based on visual observation or surname when the borrower refuses to disclose it,” said Rep. Andy Barr, R-Kentucky.
The CFPB is expected to convene a small-business review panel in the next few months with the Small Business Administration to determine the impact of the rule on small businesses.
It is still unclear how the CFPB plans to make any of the small-business data available to the public, which could be the subject of a separate notice-and-comment rulemaking after the final rule is issued in March.
Hulse said Chopra may be open to making most of the changes requested by the banking industry because consumer advocates also are concerned that the rule could result in a pullback in credit — an outcome everyone is hoping to avoid.
“The nightmare scenario is a small-business borrower goes to a bank they’ve gone to for many years, even for generations, and that bank says, ‘Sorry, we can’t give you a small-business loan because we haven’t figured out how to implement this new requirement from the CFPB,’ ” Hulse said.
