How The CFPB Can Protect Access To Credit For Small Business Borrowers

Billy Rielly

 

This week, the Consumer Financial Protection Bureau (CFPB) will receive input from stakeholders in response to its Notice of Proposed Rulemaking (NPRM) to expand data collection requirements for financial institutions in the small business lending market under Section 1071 of the Dodd-Frank Act. Here’s what’s happening, why it matters and how the CFPB can protect access to credit for small business owners in the process. 

What’s Happening

As part of the 2010 Dodd-Frank Act, Congress enacted Section 1071 to mandate certain reporting requirements for small business lenders, requiring nearly every financial institution to compile, maintain, and report information concerning credit applications made by woman-owned and minority-owned small businesses, with the goal of expanding access to credit in underserved communities. After more than a decade since Congress enacted Section 1071, the Bureau executed its authority to define the scope and requirements of the eventual regulation by issuing a proposed rule in September 2021.

Why It Matters

The complexities of collecting and reporting credit application data on woman- and minority-owned small businesses under Section 1071 cannot be overstated due to the nature of small business lending and the ways these applications are processed.

Business lending presents unique challenges and, therefore, presents an increased risk of collecting misleading data that could influence future regulation and policymaking and could ultimately negatively impact small businesses. Further, overly burdensome data collection requirements could stifle small business lending by greatly increasing compliance costs for lenders and threatening access to credit for underserved communities. A well-balanced rule implementing Section 1071 – one that considers timing and scope, as explained below – is vital to the strength and resiliency of our nation’s small businesses.  

How The CFPB Can Protect Access To Credit

The Bureau’s adoption of several previously industry-recommended provisions in its proposal will make its data collection efforts more efficient and meaningful. These positive steps include simplifying the definition of a “small business,” narrowing the scope of data collection to woman- and minority-owned small business, and the general ability for lenders to rely on borrowers’ responses to 1071 inquiries. 

However, the Bureau must also consider the following additional recommendations to expand access to credit among underserved communities and ensure the intent of Section 1071 is successfully delivered in the market: 

 

Compliance Lead
Time

Providing lenders adequate lead time to develop data collection platforms and comply with new requirements will help ensure data is accurately captured and reported without stifling efforts to expand small business’ access to credit. 

Standardized Definitions

Streamlining the standardized definition of what will constitute a “covered borrower” (small businesses whose information must be collected) will help ensure the collection of clear and reliable data that can be used to draw meaningful conclusions. 

Adherence To Existing Systems

Allowing lenders to satisfy new reporting requirements through the use of their own existing reporting systems will help minimize potential disruption to borrowers while ensuring the collection process is efficient and accurate. 

The Bottom Line

For more than a century, the nation’s leading banks have played an integral role as financiers of the American Dream for small businesses in every community they serve and remain steadfastly committed to the shared goal of increasing access to credit in underserved communities.

It is imperative the Bureau consider the recommendations of all stakeholders to avoid creating unintentional impediments to small business credit access and empower banks to satisfy Section 1071’s goals.

CBA Advocacy

Recognizing our shared commitment to protect access to credit for the millions of small businesses our members serve, CBA has successfully advocated the Bureau to consider the following provisions related to Section 1071: 

  • Narrowing the scope of data collection to women-owned or minority-owned “Small Business” entities.
  • Clarifying the definition of “Small Business” to prevent inconsistencies and confusion. 
  • Defining several transaction types not within scope, including:
  • Inquiries/pre-qualifications
  • Reevaluation, extension, and renewal requests, except requests for additional credit amounts
  • Lender initiated credit line increases
  • Solicitations and firm offers of credit

To read CBA’s statement following the Bureau’s issuance of a Notice of Proposed Rulemaking (NPRM) for Section 1071 of the Dodd-Frank Act in September, click HERE

To read CBA’s December 2020 comment letter to former CFPB Director Kraninger regarding the pending rulemaking pursuant to Section 1071, click HERE.