John Heasley

John Heasley
TBA General Counsel

CFPB starts process on fair lending for small business loans

The CFPB agreed to produce a 1071 outline for comment and the outline will be used as a basis for new regulations in 2021."

Just when we thought we had survived the worst of the Dodd-Frank Act, the CFPB has released an outline of various proposals to create a HMDA-like regime for small business lending with a focus on loans to women-owned and minority-owned businesses. 

The DFA was enacted in 2010 and the CFPB was established one year later. The thousands of pages of regulations issued by the CFPB are the main reason why we have 25% fewer community bank charters in Texas. The CFPB has recently issued an outline on how to comply with Section 1071 of the Act.

Section 1071 amends the Equal Credit Opportunity Act and requires the CFPB to collect data from all banks regarding small business loans, especially loans to businesses run by women and minorities. The CFPB did not act on this section from 2011 to 2017, during the tenure of Director Richard Cordray, and did not issue regs in the first part of the Trump administration. 

The California Reinvestment Coalition and National Association for Latino Community Asset Builders sued in federal court in May 2019 and the CFPB reached a settlement with the groups in 2020. The CFPB agreed to produce a 1071 outline for comment and the outline will be used as a basis for new regulations in 2021.

The outline is troubling in many ways. It contains exemptions for smaller banks under $100 million and $200 million and it exempts smaller banks that do not do much business lending. Only about half of Texas banks would be exempted if there is a $200 million threshold. 

It requires the collection of the 12 data points delineated in the statute and could require the disclosure of other data as well. Data must be given to the CFPB annually and data from each bank must be made available to the public.

In a classic display of bureaucratic ineptitude, the CFPB estimates that community banks’ annual compliance costs will range from $2,500 to $29,500 a year. These numbers are based on the mean hourly wage for a loan officer of $36.26. 

If they are going to create a HMDA equivalent for small business lending it will require thousands of pages of regulations. And while a trillion-dollar bank can devote dozens of attorneys and compliance specialists to the task and have it on desktops across the country in a few weeks, a community bank has only one or two employees in compliance roles. 

Smaller banks will most likely have to wait for software to be developed, purchase the software and devote a number of hours to train existing and future employees. It is not difficult to foresee that some of these 1071 proposals will cause community banks to exit the market or to severely curtail small business lending.

Public disclosure is also problematic. Community bankers concerned about reputation risk may worry that a cursory analysis may appear to show discrimination when a deeper examination would show no discrimination. 

We already have a situation in Dallas where a national community reinvestment group is working with a local CDC to allege redlining in south Dallas. The banks mentioned in a television segment had adequate CRA ratings based on their approved assessment areas but were still accused of redlining.

The legislative ambitions of the progressive left may end up being thwarted by narrow congressional majorities. Expect President Biden’s appointees to be pressured to get hard left results through the regulatory process. Section 1071 is one area where we expect more pressure from the Democratically controlled U.S. House.

TBA President Chris Furlow has already commented on the problems in the 1071 outline. As this initiative moves through the regulatory process TBA will continue to be engaged. On this issue and others coming from the agencies, it looks like we have a fight on our hands.