Washington flexes its muscles on small-business lending
Federal banking regulators have waded in recent weeks into two separate controversies involving small-business lending, abandoning the caution they have long maintained on both issues.
In one instance, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency angered borrower advocates by siding in court with a high-cost business lender. In the other, the Consumer Financial Protection Bureau signaled its intention to move forward with a small-business lending rule that has languished for nine years amid sharp disagreements over its proper scope.
The moves suggest that the Trump administration is starting to flex its muscles on the regulation of small-business lending. Court decisions and inaction by the legislative and executive branches in Washington have ceded power to the states in recent years.
On Wednesday, the CFPB will hold a symposium on how to implement a provision of the Dodd-Frank Act that requires lenders to collect and report certain information about small-business borrowers, including whether the firms are owned by women or minorities.
The event, which will feature remarks by CFPB Director Kathy Kraninger, is a notable step forward in a rulemaking process that has moved at a glacial pace during both the Obama and Trump administrations. The speakers will include numerous lenders, two researchers from right-leaning think tanks and the president of the National Community Reinvestment Coalition.
The discussion is likely to touch on how much data the CFPB should collect from small-business lenders. The Dodd-Frank Act requires the collection of certain information that can be used to identify instances of discrimination — similar to the regulators’ use of data reported under the Home Mortgage Disclosure Act — but it also gives the CFPB discretion on whether to collect additional information, and there is sharp disagreement over how far the bureau should go.
“I do think that there is going to be a big fight,” said Luz Urrutia, the CEO of Opportunity Fund, a nonprofit small-business lender based in California.
Herrera, who is scheduled to speak Wednesday at the CFPB symposium, argued that the bureau should collect data on interest rates, fees and default rates in an effort to assess the damage that predatory loans are doing to small businesses across the country.
Last year, California became the first state to require small-business lenders to disclose interest rates to borrowers in a standardized format, though the law has yet to take effect.
Former CFPB Director Richard Cordray said in an interview that the rationale for collecting data in an effort to detect discrimination in consumer lending applies equally to the small-business lending realm. “There’s a lot of opaqueness in small-business lending,” he said.
Cordray attributed the CFPB’s slow progress on the issue during his tenure to the raft of responsibilities that the bureau was given under Dodd-Frank and the logic in waiting to piggy-back on technology that was under development. But he also acknowledged that the CFPB faced pushback from small-business lenders.
Many lenders maintain that the CFPB should take a narrow approach to its responsibilities, citing the costs that a broad data-collection requirement would impose, and arguing that those costs would be passed along to borrowers.
The American Bankers Association has called the collection and reporting of small-business loan data a “Herculean task” and argued that the bureau’s data collection should not go beyond what Dodd-Frank explicitly requires.
Similarly, the Innovative Lending Platform Association, which represents online lenders such as Kabbage and OnDeck Capital, has argued that a more expansive approach by the CFPB would result in higher lending costs and fewer options for small-business borrowers.
Another issue likely to be discussed at Wednesday’s hearing is what types of small-business finance products should be covered by the CFPB’s rules. The market includes not only loans and lines of credit, but also products that provide advances on expected payments or base repayment on a fixed percentage of future sales.
As the CFPB weighs its next steps on lending data, the OCC and the FDIC have drawn flak for siding recently with a nonbank lender that specializes in subprime credit to small businesses.
The case involves a loan obtained by a Colorado-based business that carried a triple-digit annual percentage rate. A small Wisconsin-based bank made the loan, but it was soon transferred to New Jersey-based World Business Lenders.
At issue is whether World Business Lenders can enforce the original interest rate on the loan, which exceeded a 45% interest rate cap in Colorado. The Colorado rate cap cannot be enforced against banks headquartered in most other states, but the question of whether the privileges granted to banks are transferable to nonbank lenders has been hotly contested in the courts.
Most notably, the Second Circuit Court of Appeals ruled in 2015 that the nonbank buyer of credit card debt owed by a New York resident could not collect above the Empire State’s rate cap. That landmark decision has had broad ripple effects for many lenders that operate in New York, and federal banking regulators have long argued that it was wrongly decided.
In the Colorado case, the FDIC and OCC have maintained that World Business Lenders should be able to collect on the high-cost loan. Although the Colorado case involves a small-business loan, the legal issues that it addresses have broader implications across lending segments. The two federal banking agencies argue that the Second Circuit’s decision has had a negative impact on credit markets.
“When you have a court case that steps in and interjects the possibility of 50 different state laws overtaking national policy, it would make those bank loans sold on the secondary market almost worthless in certain marketplaces,” a senior FDIC official said in an interview Tuesday.
An OCC spokesman declined to comment.
Advocacy groups, including the National Consumer Law Center, the Center for Responsible Lending and the Woodstock Institute, have expressed alarm over the agencies’ position in the Colorado case. Their outrage stems in part from a belief that the arrangement between the Wisconsin bank and World Business Lenders was designed to get around state interest rate caps.
“It sends a terrible signal for the FDIC and OCC to support a predatory lender that used a bank to enable a destructive 120% APR loan,” the advocacy groups wrote in a recent letter to Comptroller of the Currency Joseph Otting and FDIC Chairman Jelena McWilliams.