CFPB data collection rule could exempt smallest small-business lenders
The Consumer Financial Protection Bureau finally detailed what small-business lending data it may require under the Dodd-Frank Act, but the agency also appears willing to relieve certain lenders from the reporting requirements.
The CFPB said in a 79-page outline released Tuesday that it is considering whether to exempt lenders with under $100 million or $200 million of assets out of concern that some entities “might reduce or cease their small-business lending activity because of the fixed costs of" compliance. To implement Section 1071 of Dodd-Frank, the agency is also considering exempting institutions that make few small-business loans.
The data requirements — similar to reporting obligations applicable to mortgage lenders — are designed to assess small businesses' credit needs and whether borrowers experience lending discrimination.
Banks have largely resisted collecting data on women- and minority-owned small businesses by claiming it requires too much paperwork and is a regulatory burden. But experts note that the federal government needs some visibility — where none exists currently — on the credit needs of small entities.
"We are one of the few countries that does not nationally collect small business loan origination data," said Karen Mills, a senior fellow at Harvard Business School and former head of the Small Business Administration under President Barack Obama. “It will do a lot of good for America’s small businesses, which don’t have a big lobbying arm, as they are busy running their businesses. And right now, by the way, they are in huge trouble.”
Yet the proposed exemptions in the outline and other details will likely elicit pushback from consumer groups.
The CFPB was mandated to release an outline by Tuesday under a settlement with the California Reinvestment Coalition, which sued the bureau last year to force a rulemaking on one of the last provisions of Dodd-Frank Act still to be implemented.
Dodd-Frank requires that financial institutions collect, report and make public certain data on credit applications made by women-owned, minority-owned and small businesses. The data is similar to information that banks and lenders currently collect from mortgage applicants under the Home Mortgage Disclosure Act.
In addition to exemptions for a lender's size, the bureau is considering three possible exemption thresholds for small-business loan volume: fewer than 25 loans or $2.5 million; 50 loans or $5 million; or 100 loans or $10 million.
Yet for companies required to submit the data, the CFPB is considering adding certain discretionary data points. Dodd-Frank allows the bureau to include certain details at will. The agency said it is weighing whether to include things like loan price, the amount of time a small business has been in operation and its number of employees.
“The reason why pricing is a good thing is, to understand the market, you need to understand that access to credit at a 30% annual percentage rate is very different from 300% APR," said Luz Urrutia, the CEO of Opportunity Fund, a Community Development Financial Institution in San Jose, Calif., and a former member of the CFPB's consumer advisory board. "By simply creating transparency into models, the government can create incentives that encourages the development of business models that are successful at reaching minority- and women-owned businesses.”
But consumer groups are likely to criticize the CFPB for considering that some products be left out of the rule, including consumer credit used for business purposes, leases, trade credit, factoring and merchant cash advances.
The CFPB said that term loans, lines of credit and business credit cards, collectively, make up the majority of business financing products used by small businesses and are "an essential source of financing for such businesses."
At the same time, the CFPB said in the outline that “data on loans to small businesses currently is very limited.”
Although banks provide lending data in call reports, that data captures the outstanding number and amount of loans held on bank balance sheets, not the flow of loans.
"If you want to really understand where the gaps are in the market, and whether creditworthy small-business owners are not getting loans, we need to know the flow of loans," Mills said. “We should know if we are providing credit that meets the needs of small-business owners, which provide half the jobs in our economy. But right now it’s like flying blind because we are trying to assess the gaps in the market without the relevant data.”
The CFPB also is considering requiring just data on all small-business loans, instead of including special categories for women-owned and minority-owned businesses. The bureau said it is concerned that collecting data on applications just for women-owned and minority-owned businesses would result in limited information on small businesses and “could affect all aspects of" financial institutions’ commercial lending operations.
The CFPB’s outline is peppered with questions for public comment about the data collection. For example, the bureau asks whether different asset sizes or loan volume thresholds would be more appropriate for determining the scope of reporting exemptions. and how long small financial institutions would need to conform their practices to the proposals under consideration.
The CFPB is required to convene a small-business panel of experts by Oct. 15 that will produce a report by mid-December examining the impact of a potential rule on small businesses. Under the settlement, the agency must agree on a timeline with the California Reinvestment Coalition for a notice of proposed rulemaking expected next year, said Kevin Stein, the California group's deputy director.
“This will be a game-changer in terms of access to credit,” Stein said. “For all of those that claim to be very concerned about the racial-wealth gap, this is the perfect opportunity to support a strong rule that makes clear which institutions are lending to which borrowers on what terms and where."
Urrutia said that the rulemaking needs to get going because small businesses are in need of credit.
“This is 10 years overdue, so let’s get the data and start the reporting,” she said.