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CBA Letter to CFPB re Small Business Lending Market RFI
September 13, 2017
The Honorable Richard Cordray
C/O Monica Jackson, Office of the Executive Secretary
Consumer Financial Protection Bureau
1700 G Street, NW Washington, DC 20552
Submitted electronically to: http://www.regulations.gov
Re: Docket No.: CFPB-2017-0011 - Small Business Data Collection
Dear Director Cordray:
The Consumer Bankers Association (―CBA‖)1 greatly appreciates the opportunity to comment on the Consumer Financial Protection Bureau’s (―CFPB‖ or ―Bureau‖) Request for Information (―RFI‖) about the small business lending market. Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (―Dodd-Frank Act‖), which amends the Equal Credit Opportunity Act (―ECOA‖) to require financial institutions to compile, maintain, and report information concerning credit applications made by women-owned, minority-owned, and small businesses. Under the section, every financial institution must inquire of any business applying for credit whether the business is a small business, or a women- or minority-owned business, maintain a record of the information separate from the application, and report the information along with related information about the application to the CFPB. The information must be made public on request in a manner to be established by regulation, and will be made public annually by the Bureau.
CBA and its member institutions strongly believe that the CFPB should keep top of mind that although Section 1071 mandates this rule, it is not as simple as data collection efforts undertaken on other lending products such as residential mortgages. The notion that business lending parallels nicely to residential mortgage lending is misplaced. The use of Home
Mortgage Disclosure Act (―HMDA‖)-like reporting for business lending activity to ferret out potential discrimination is, in our opinion, a tremendously flawed premise because the two types of transactions differ inherently in many key aspects:
- Residential lending all shares the same type of collateral. Business lending may not be secured at all, and when secured, the type of collateral varies tremendously.
- Residential lending has (with rare exceptions) consumers as the applicants. Business lending involves loans to all sorts of applicants, ranging from sole-proprietors to sophisticated corporate structures.
- Business loans are often renewals rather than new loans. These renewals are not akin to refinances in the residential world.
- Business loans have much shorter and varied durations.
- The appropriate property address for a business loan to use for reporting and analysis can be debated with no easy or right answer.
- Capturing business loan applicants for reporting and analysis can be debated with no easy or right answer given the various ownership and structures.
We believe the CFPB must be keenly aware that the dissimilar nature of business lending when trying to construct this rule presents two-fold challenges:
- Determining which data fields to mandate be collected, developing standard values to be reported for many of the fields, and proposing workable rules for how to collect and report the data will be tremendously difficult, at least if the goal is to have a thoughtful, achievable rule that yields useful data.
- Constructing fair lending analysis approaches that will yield meaningful and appropriate conclusions for business lending is likely even more challenging.
In light of these issues and the need to streamline the credit process in order to extend credit with greater speed to qualified applicants, CBA and its member institutions cannot stress enough the importance of well-balanced rules under Section 1071 in order to avoid overly burdensome data collection requirements that could stifle small business lending, greatly increase compliance costs for small business lenders, and open the door to costly litigation. Key to this rulemaking will be the ability for lenders to address 1071 reporting compliance with already existing reporting systems (e.g. Community Reinvestment Act, FinCEN Beneficial Ownership Rules, etc.) in order to ensure as little disruption in the market at possible. These systems will need to be automated and accurate. Adherence to systems already in place will allow lenders streamline the collection process.
CBA formulated the following concerns through consultation with our Community Reinvestment, Fair and Responsible Banking and Small Business Banking Committees. As noted, Section 1071 is going to be a very complicated and difficult law for lenders and applicants to implement, and the manner in which the CFPB implements one requirement of the law will likely impact the implementation and impact of other provisions. Consequently, some of the suggestions below may need to be revised based on the CFPB’s approach. We therefore request feedback from the CFPB concerning its anticipated approach to some of the difficult questions so the industry is able to react and reconsider the issues.
Again, we thank you for your consideration and we look forward working with the CFPB as it assesses the issues surrounding small business data collection.
1) Small Business Definition
There are several important issues that need to be addressed for the purpose of streamlining the 1071 rulemaking. These include:
- Limiting the collection to women or minority owned ―Small Business‖ entities only,
- Simplifying the definition of ―Small Business‖ to one that is easily applied at time of application,
- Defining products in scope for reporting (e.g. home equity lines of credit, lines of credit, brokerage secured accounts, letters of credit, etc.), and
- Defining transaction types that are in scope (e.g. new loans). CBA believes modifications to existing loans are not in scope.
Limiting Data Collection to Woman- and Minority-Owned Small Business
The language of new subsection 704B (a) and (b) reads:
―Purpose – The purpose of this section is to facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, AND small
―(b) Information Gathering – Subject to the requirements of this section, in the case of any application to a financial institution for credit for women-owned, minority-owned, OR small business, the financial institution shall…‖ (Emphasis added).
A strict reading of the statutory language would mandate lenders to collect information for ALL entities, large or small, that are at least 51% owned by women and/or minorities and for ALL small business, regardless of ownership characteristics. This strict interpretation, of course, poses many issues with the scope of the proposed data collection and the logistical burden it would require. It would be reasonable to assume Congress did not intend to have lenders collect this type of information on large companies.
We believe that the scope of the statute should be limited to women- or minority-owned small businesses, rather than all commercial loan applicants. Including large businesses that are women - or minority-owned would substantially increase regulatory burden without providing additional insight into small business financing practices or meaningful tools for determining discrimination due to the fact that loans to larger businesses are more heterogeneous and therefore less comparable.