John Heasley

John Heasley
TBA General Counsel

Are you ready for fair lending reporting for small business loans?

There are currently 25% fewer community bank charters in the U.S. than there were in 2010 and the proximate cause is the DFA.

The Dodd-Frank Act was signed into law in July 2010 by President Obama. Community banks are still laboring under the regulatory burden created by the thousands of pages of regulations issued by the Consumer Financial Protection Bureau, the brainchild of Sen. Elizabeth Warren and hallmark of the law according to consumer activists. There are currently 25% fewer community bank charters in the U.S. than there were in 2010 and the proximate cause is the DFA.

Part of the mandate given to the CFPB was Section 1071, which amended the Equal Credit Opportunity Act to require financial institutions to compile, maintain and submit to the bureau certain data on applications for credit for women-owned, minority-owned and small businesses. It appears that the law envisioned a system for small business lending that mirrors the HMDA requirements used in mortgage lending.

The difficulties in setting up such a scheme for small business loans are obvious. How many types of small business loans are there? What types of small business credit should be considered? What would the costs be for a community bank to implement such a system? This is not an apples-to-apples comparison when you try to set up a HMDA-like regime.

Nothing was done about Section 1071 when the CFPB was run by Richard Cordray, the Democratic appointee. Similarly, nothing was done by Acting Director Mick Mulvaney or Director Kathy Kraninger, the Trump appointees.

That all changed when the CFPB was sued last year in federal court by the California Reinvestment Coalition, which sought to force the CFPB to issue small business reporting regulations. The CFPB reached a settlement in the case and issued a 79-page proposed outline for data collection.

The CFPB is asking for input on a number of issues involved in 1071 but has proposed the following mandatory data points for banks to collect and report annually to the bureau:

  • whether the applicant is a women-owned, minority-owned and/or small business,
  • application/loan number,
  • application date,
  • loan/credit type,
  • loan/credit purpose,
  • credit amount/limit applied for,
  • credit amount/limit approved,
  • type of action taken,
  • action taken date, 
  • census tract (principle place of business),
  • gross annual revenue and
  • race, sex and ethnicity of the applicant’s principle owners.

The CFPB has suggested a two-year implementation period and an exemption for smaller lenders, two areas where consumer advocates have objected. Compliance costs for business lenders will increase greatly even if software is developed to collect and report this data. There is a CFPB meeting with consumer groups this month. Other affected parties need to submit comments to the bureau by Dec. 14.

Looming over all of this is the November election. If the White House changes hands, we can expect a new head of CFPB to take Kraninger’s place, access the annual $600 million from the Fed, lawyer up and discard or rewrite a number of Trump era regulations. The new administration will most likely strengthen the 1071 reg and make it enforceable sooner and with fewer exemptions.