Community banks ensure that lenders meet the credit needs of all small businesses in accordance with fair lending laws, but policymakers must consider the potential harm of any new regulations on the entities they are meant to help. With community banks leading the country in lending to small businesses, the Consumer Financial Protection Bureau should adapt its proposed data collection and reporting requirements for small business loans to avoid restricting access to credit in local communities.
Section 1071 of the Dodd-Frank Act directs the CFPB to implement rules requiring lenders to collect and report data on applicants for credit. The law specifies several data points that financial institutions must compile on applications from women-, minority-, and small-business-owned businesses, including the race, gender, and ethnicity of primary owners as well as annual income. raw.
While these requirements are mandated by law, the CFPB nevertheless has the power to exempt any class of financial institutions from the standards it develops and to limit mandatory data points to those required by law. To mitigate the potentially harmful impact of these new reporting burdens on small business lending, community banks are encouraging the CFPB to exercise its authority to adapt its regulations.
Community banks’ fundamental concern with Section 1071 is that its standardized data collection process requires a homogenized approach that runs counter to the individualized nature of community banks’ small business lending. Data collection requirements would significantly reduce the ability of community banks to provide small businesses with the kind of credit they need in a timely and efficient manner.
Data collection and reporting mandates would also add to existing regulatory and administrative burdens. The cost of this new mandate would be disproportionately high for community banks without the scale needed to spread compliance costs across a broad asset base, ultimately hurting the borrowers the law is trying to help – belonging to women, minorities and small businesses.
In addition, the collection and public disclosure of personal data raises concerns about candidate privacy, especially in smaller communities. In my travels across the country, I’ve heard community bankers worry that some of their small business clients are the only such businesses in their local community, like the town dentist or the auto repair shop. So even if the client’s name would be removed from the publication, the publication of specific data points – rather than aggregated data – would provide the means to re-identify loan applicants.
Recognizing these concerns, the CFPB has proposed exemptions for smaller lenders to limit the negative impact of the proposal. Unfortunately for borrowers, the exemption would not apply to the vast majority of financial institutions.
The CFPB would exempt institutions that issued fewer than 25 covered loans to small businesses in each of the previous two years – a threshold too low for even most of the smallest banks in the country. In reality, at least 780 banks with less than $100 million in assets would exceed the threshold of 25 loans.
To better balance the benefit of the reporting rule with its impact on smaller lenders, the CFPB should use the banking regulators’ asset threshold for a “small bank” as defined in the Community Reinvestment Act regulations. . Exempting community banks below this threshold would use an established line that distinguishes entities with more advanced compliance systems for CRA data collection.
The CFPB should also lower its gross annual income standard for affected small businesses to streamline the process. The bureau’s proposed rule would require data collection and reporting on companies with gross annual revenue of $5 million or less. Defining small businesses as those with annual gross income of $1 million or less would align with existing regulations to drive compliance while ensuring that more than 90% of small business loans are covered.
To further limit the negative impact of the rule, the CFPB should stick to data points mandated by Congress, instead of nearly doubling the number and increasing the compliance burden. The office could also reduce associated privacy risks by releasing a comprehensive privacy test for public comment before determining what data to make public. Finally, staggering the implementation date for smaller community banks and basing fair lending actions on data collected over three years would allow regulators to observe data trends and lessen the negative impact of the rule.
Community bank small business lending is a complex process that cannot be trivialized like consumer or mortgage lending, which would have a chilling effect on access to credit. To avoid putting commercial customers of community banks at a disadvantage, the CFPB should adapt its Section 1071 rule and align it with the existing regulatory thresholds.