The danger of kneecapping the CFPB's small-business data rule

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In June 1977, Sen. William Proxmire, D-Wis., rose on the Senate floor to argue in favor of the passage of the Housing and Community Development Act — a bill that made various adjustments to a number of civil rights bills, and importantly introduced what we know today as the Community Reinvestment Act. 

"Unfortunately, we find many banks and many savings and loan[s] which take money from the community and reinvest it elsewhere, in some cases abroad, in some cases in other parts of the country," said Proxmire, who served as Senate Banking Committee chair at the time. "We think this ought to be taken into consideration as one element in deciding whether or not the institution would be allowed to grow."

Later, Proxmire explained how he and his colleagues supporting the bill arrived at those conclusions: by reviewing newly available data compiled as part of the Home Mortgage Disclosure Act of 1975. 

"We passed a mild version of [HMDA], requiring financial institutions just to disclose where home mortgage loans are made," Proxmire said. "The data provided by that act remove any doubt that redlining indeed exists, that many credit-worthy areas are denied loans. This denial of credit, while it is certainly not the sole cause of our urban problems, undoubtedly aggravates urban decline."

Fast forward to 2010, when then-Sen. Olympia Snowe, R-Maine, argued on that same Senate floor against section 1071 of the soon-to-be-passed Dodd-Frank Act — a provision that would effectively require banks to disclose data on small-business loans similar to the information they had been disclosing about home mortgages for 35 years.

"The vast majority of banks are small community-centered institutions," Snowe said. "For small community banks, every dollar spent on complying with government regulations is another dollar that cannot be used for customer service or extending credit. While these existing processes may be in place at large banks — and even if not, their procurement would be relatively inexpensive — for a small bank this could have a sizable impact on their bottom line and prove to be an extremely large regulatory burden."

And fast forward again to October, when the Senate passed a Congressional Review Act resolution that would nullify the Consumer Financial Protection Bureau's final rule implementing 1071 (by a vote of 53-44), and more recently to last Friday, when the House followed suit by a vote of 221-202. The resolution is now heading to President Biden's desk for a promised veto.

The passage of a CRA resolution that will never be enacted is an empty gesture — the Democrats who crossed the aisle to vote for it likely did so because it gives them a way to differentiate themselves from an unpopular president in an election year without any tangible consequence. 

But the CRA is not the only venue in which 1071 is under attack: Banks are challenging the final rule in court on substantive and procedural grounds, and a judge has issued an injunction against the rule until everyone knows for sure that there will still be a CFPB this time next year. I don't know what the future holds for the 1071 rule, but given the complex interplay of elections, court rulings, Administrative Procedure Act timelines, CRA deadlines and whatever the Supreme Court decides to do with the Chevron doctrine, there is a decent chance that this rule will be tied up in one challenge or another for years.

Politics and policy

House votes to nullify CFPB small-business data rule

December 1, 2023 3:34 PM

As we all know, members of Congress say a lot of things and political debate is not bound by the normal rhetorical demands of clarity and consistency, especially from one lawmaker to the next, and even more especially from one decade to the next. But I think it's worth noting that HMDA — the 1071 rule's closest antecedent — was passed as a way to determine whether banks were still discriminating against minorities in originating home mortgages, and found that they in fact were, albeit by other means.

There's reason to believe that a similar thing may be happening in small-business lending as well — and that's important, because homeownership and small-business ownership are the two major ways that households create the kind of intergenerational wealth that uplifts families and communities that were historically denied those opportunities as a matter of law. Deciding not to look for that kind of discrimination because it's too hard or expensive to find is at best lazy, and at worst abets wrongdoing and/or stands in the way of economic growth.

Supporting small businesses is one of those ideas that everybody — Democrats and Republicans, banks and nonbanks, cat people and dog people — nominally supports. For that reason, I can't think of a good reason why it's bad policy to find out more about how small businesses obtain credit (or don't) from the entities offering that credit. That data very well may be revelatory — and I suspect that's what 1071's opponents are afraid of.