CFPB data collection plan may be too expensive for some banks and credit unions | Credit Union Journal


Credit unions and banks serving local community institutions could abandon small business lending efforts due to the potential cost of complying with the Consumer Financial Protection Bureau’s data collection plan.

The CFPB wants identify patterns of discrimination and prejudice in small business lending by requiring depository institutions and alternative lenders to collect and report data to the agency. The plan was originally released on September 1 and prompted immediate pushback from lenders who thought it would be too costly to implement, with many saying the proposed rule would disproportionately affect smaller, under-resourced institutions. to comply with reporting requirements.

Since then, the rule has garnered more than 2,100 comments from trade groups like the National Association of Federally-Insured Credit Unions and the Credit Union National Association, which are calling for changes to its scope. A final rule is expected to be published in 2023.

Dale Baker, NAFCU’s regulatory affairs attorney, explained that the minimum threshold of 25 covered credit transactions and high gross annual revenue to determine covered small businesses – those with gross annual revenue of $5 million. or less for the previous year – would disproportionately affect smaller credit unions that lack the economies of scale to adapt to new reporting requirements.

“You have smaller [credit unions] that might offer a very small suite of commercial products, but quickly exceed that 25 cap,” requiring them to retrain staff on how to collect the newly required race and ethnicity information from applicants, Baker said. “You talk about adding staff where it’s really not possible and you talk, in many ways, about discouraging credit unions from offering certain products.”

Jeff Dick (left), CEO of MainStreet Bank; and Alexander Monterrubio, senior advocacy director and attorney for CUNA. “There are likely to be institutions that decide to cut their offerings to small businesses because being subject to the rule…is just too costly,” Monterrubio said.

the Federal Deposit Insurance Corporation. said Tuesday that only 30% of small business owners who sought traditional financing in 2021 received the full amount of financing they initially wanted, compared to 36% in 2020 and 51% in 2019.

To help smaller institutions meet the requirements set out in its proposal, the CFPB aims to provide resources such as a summary of the rules, a compliance guide and sample forms that will help lenders determine whether they are required to declare or not.

The CFPB compared the collection of information – which is required under Section 1071 of the Dodd-Frank Act – to data reported under the Home Mortgage Disclosure Act. The regulator’s overall goal for the proposed rule is to facilitate fair lending practices, while helping communities and lenders identify the credit needs of small businesses, according to a CFPB spokesperson.

But the CFPB’s proposed guidelines for eligibility would cover institutions that are normally exempt from HMDA reporting.

According to Alexander Monterrubio, CUNA’s senior advocacy director and attorney, the impact data collection and reporting would have on credit unions that have little or no experience with regulations such as HMDA would deter them from offering services to small business customers.

For many, “this might be the first time they’ve encountered data collection of this complexity,” Monterrubio said. “There are likely to be institutions that decide to cut back on their offerings to small businesses because being subject to the Section 1071 rule is just too expensive.”

In addition to training staff and ensuring core systems can handle the accumulation and secure storage of new data, applicants’ willingness to disclose personal information related to their gender and ethnicity could also influence on the decision of credit unions to continue these lending efforts.

Dale Hansard, managing director of the Caprock Federal Credit Union, with $38 million in assets in Lamesa, Texas, explained that speaking with members — about 70% of whom are considered minorities — many n were not comfortable providing details of their race in loan applications.

“When we did the Paycheck Protection Program loans, we saw several applicants come in without saying anything about their ethnicity and say, ‘I don’t want to divulge this,'” Hansard said.

As the credit union begins offering commercial and small business loans, it will continue to review the CFPB proposal to guide the development of Capcom’s new program, Hansard said.

“The nerve-wracking thing about trying to get it right in the first place is that you can’t even start a program or make it profitable with less than 25 loans…so you’re going to have to hit that threshold to make it worth putting pen to paper,” Hansard said.

banking organizations like the Independent Community Bankers of America also expressed concerns about how the proposal would burden community institutions and small businesses receiving credit.

According to Paul Merski, ICBA’s executive vice president of congressional relations and strategy, many of the country’s roughly 5,000 community banks use lending programs tailored to local businesses as niche offerings for their provide access to credit. Banks may be forced to standardize their offerings to offset the costs associated with reporting requirements.

“Mortgage lending is quite systematic and standardized, while small business lending [can be] very specialized and very unique…if you increase the cost significantly, you will have more community banks giving out more standardized small business loans,” which will end up being counterproductive in helping provide credit to small businesses, said Mersky said.

The CFPB included in its proposal a provision that would grant the lender the ability to determine the race and ethnicity of an applicant’s primary owner using visual observation and the surname provided during an in-person meeting. or virtually. Regarding gender identity, applicants would have the privilege of describing themselves instead of or in addition to selecting either male or female.

With careful scrutiny of the accuracy of reported data, credit unions and banks are concerned that using visual appearance and surnames to determine applicants’ race and ethnicity could lead to incidents of erroneous declaration and sanctions on the part of the CFPB.

“We’re trying to be as efficient as possible and we’re trying to use technology as best we can, but we’re also in a very expensive area of ​​operation,” said Jeff Dick, CEO of 1’s company. $7 billion. active MainStreet Bank in Fairfax, Virginia. “Every person we have still matters.”

The CFPB plans to make the reports available to the public on an annual basis, pending the adjustment or redaction of sensitive documents which will be determined by a “balancing test” to assess the risks and benefits of public disclosure. .


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