It’s called a fishing expedition. A burden on small banks and credit unions. An example of regulatory overrun.
A proposal to collect data on the race, ethnicity and gender of small business borrowers drew nearly 1,700 comments to the Consumer Financial Protection Bureau, many of which deepen the criticism that has piled up since it was unveiled in September.
Many community bankers and credit union executives said the rule would make it harder for smaller financial institutions to compete, forcing some to forgo small business loans altogether. Others said some aspects of the data collection contradicted the number of banks in operation.
bankers are worried that the CFPB will use small business data to find targets for fair lending investigations given that director Rohit Chopra has put the fight against redlining at the top of his game agenda.
“When implemented thoughtfully and in partnership with key stakeholders, collecting more data on small business lending has great potential to advance our shared goals of financing the American Dream for business. belonging to minorities and women and expanding access to credit in underserved communities”, “However, there is also an increased risk of collecting misleading or incomplete data which could negatively impact small businesses and stifle small business lending,” wrote David Pommerehn, general counsel and senior vice president of the Consumer Bankers Association.
Comment letter after comment letter, bankers urged the CFPB to scale back its proposal, essentially trying to reduce the number of institutions that would be required to report.
Trade groups are calling for outright exemptions for small institutions. The Credit Union National Association is calling for entities with $600 million in assets or less to be exempt. The Independent Community Bankers of America wants banks with assets of $1.3 billion or less to be excluded.
“Community Bank small business lending is complex – it should not be trivialized and subjected to a simplified and rigid analysis that would have a chilling effect on small business lending,” wrote the ICBA President and CEO. , Rebecca Romero Rainey. “While ICBA supports the proposal’s goal of expanding access to credit for minorities, women and small businesses, we are concerned that its overly broad coverage could disadvantage commercial customers of community banks.
Many commentators have expressed concern that smaller banks and credit unions lack the resources to hire more employees to collect and submit the data.
“The CFPB’s regulation of small business loan data collection will likely add significant strain on credit unions’ limited resources,” wrote Andrew Oliphant, retail training mentor at Meritrust Credit Union in Wichita, Kansas. “This pressure, coupled with the regulatory challenges that credit unions already face in the area of business lending, could cause credit unions to reduce their small business loan offerings, eliminate such offerings altogether, or discourage cooperatives of credit to offer business loans in the future.”
The CFPB proposal was released last year and lasted for a decade, pursuant to Section 1071 of the Dodd-Frank Act. The lack of a comprehensive small business loan database has been a major impediment to government relief efforts during the coronavirus pandemic. Some analysts have called the lack of data on small businesses a problem in rolling out and tracking the Small Business Administration’s Paycheck Protection Program.
“It is not possible with current data to confidently answer basic questions about the state of small business lending,” the CFPB said when releasing its proposal.
Financial institutions that provide at least 25 small business loans per year for two consecutive years should collect and report the data. Some bankers have called for the threshold to be raised to 500 or 1,000 loans per year.
A minimum of 13 specific data points would be collected. Dodd-Frank gave the CFPB the power to extend the data even further. Consumer groups want more data added. For example, the National Community Reinvestment Coalition urged the bureau to collect the annual percentage rate on small business loans and credit scores from small business loan applicants.
Bankers want less data collected. Some bankers have asked the CFPB to redefine a small business as an entity whose revenues do not exceed $1 million per year, a fraction of the proposal current definition of $5 million in revenue.
Ann-Marie Weasel, a banker with the $1.1 billion Union Bank Co. in Columbus Grove, Ohio, urged the CFPB to create even more exemptions, give three years for lenders to prepare to comply with the final rule and make other changes. .
“Ultimately, data collection can reduce the availability of credit and increase its cost,” Weasel wrote.
Yet the majority of the letters did not speak directly to the elephant in the room: collecting data on small business loans should lead to fairer application of loans and potentially public shaming of banks for alleged discrimination. against minority-owned businesses. Instead, bankers held to the theme that the proposal would add to their already onerous compliance costs.
A point of contention also came from the CFPB’s proposal that lenders themselves identify the race, ethnicity and gender of a small business’ primary owners based on last name or visual cues. Bankers say this requirement puts them in a bad position.
“The financial institution should not be required to verify or use any other information or best estimate based on visual observation, surname, or any other basis,” wrote Kenneth A. Witbrodt, CEO of the Montgomery Bank, with $1.2 billion in assets in Sikeston, Missouri. “The financial institution must declare the data provided or not provided by the applicant. If the applicant chooses not to provide information, that wish should be honored.
Many bankers also said the CFPB proposal would put smaller banks at a competitive disadvantage. Requiring lenders to create a “firewall” to prevent employees involved in lending decisions from knowing an applicant’s race, ethnicity and gender was widely seen as unworkable.
“For most banks, the commercial loan officer collects the application information from the applicant and deals directly with the applicant throughout the loan process. As a result, the lender is already clearly aware of this information,” said Paul Reherman, senior vice president of Interbank, with $3.7 billion in assets, in Oklahoma City, Okla. “Implementing a firewall process to separately collect this information will create a additional burden on financial institutions and really does not accomplish the intent of the firewall.We ask that this requirement be removed.
Bankers have also expressed concerns about the data made available to the public. The CFPB said it plans to edit or remove information to protect borrowers’ privacy. The bureau also proposes a “balancing test” that would weigh the risks and benefits of public disclosure. The test would be done after the first year of receiving the data.