CFPB embarks on a business lending quagmire for community banks

Software costs, training and employee hours devoted to this will increase for all institutions. 

The Dodd-Frank Act was signed into law by President Obama in 2010 and was hailed by its supporters as a historic piece of legislation that would do away with the Too-Big-To-Fail doctrine and usher in an era of unprecedented consumer protection. The TBTF banks are now even bigger and arguably more immune to failure. The major result of the Act has been the loss of more than 25% of community bank charters nationwide.

TBA was aware of what the effects of the law would be even before it was enacted. The creation of the Consumer Financial Protection Bureau, with almost unlimited funding from the Federal Reserve, gave the new agency powers to rewrite, enhance and enforce 17 consumer protection and fair lending laws. The CFPB has the power to determine what financial products can be offered, how they are offered, to whom they are offered and how much they can cost — powers that give the Bureau control over an estimated 17% of the economy. Knowing that the burden would fall more heavily on community banks, TBA set up a task force of compliance experts from across the state to find a way to make compliance more affordable. That task force resulted in the creation of Compliance Alliance which helps banks in Texas and across the country.

Starting 2011, the CFPB lived up to expectations by, among other actions, producing 600 pages of regulations on qualified mortgages and 1200 pages on TRID. The agency also led the charge along with the other Obama-appointed regulators to ramp up fair lending exams by using disparate impact analysis. We were especially worried about Section 1071 of DFA which directed the CFPB to collect data on applications for credit for small businesses, especially those that are owned by women or minorities. The provision was intended to create a HMDA-equivalent regime for small business lending. Let’s acknowledge up front how costly such a system would be to implement, how many dozens of types of small business loans there are and the difficulties that would be caused by regulators hell-bent on achieving social and economic justice. No action was taken on 1071 for 10 years and we hoped that the difficulty in creating and implementing such a system was acting as a deterrent.

It was all wishful thinking.

In 2019, a community reinvestment group in California sued the CFPB for the lack of action on 1071 and the agency agreed to produce proposed regulations by Sept. 30, 2021. On Sept. 1, the bureau published a 918-page notice of proposed rulemaking. It covers any lender that originates 25 or more loans a year. It requires the reporting of data on term loans, lines of credit, credit cards and merchant cash advances. A small business is defined as an entity that has $5 million or less in gross revenue. The CFPB released a chart of 23 data points to be collected on credit amounts, approval/denial, pricing and the race, ethnicity and sex of the business loan applicant. Much of the data will be made publicly available.

The compliance costs for this proposal will fall more heavily on smaller institutions. Software costs, training and employee hours devoted to this will increase for all institutions.

This type of data is subject to misinterpretation in normal times but in our politically charged environment it may create unnecessary and potentially costly scrutiny by regulators, consumer groups and litigators. In an April fair lending report, the acting CFPB Director wrote that economic impacts of COVID-19 combined with “the lingering impacts” of “institutionalized discrimination” deepen racial inequities and the Bureau will “apply a racial equity lens” to its work. A Florida activist told the American Banker “When the small-business loan data comes out and everyone sees the low level of lending [to minority communities], it’s going to be a train wreck.”

Comments on the rulemaking are due in December and TBA will be submitting a letter vigorously opposing the regulation. We need help from bankers across the state to tell us how this proposal could adversely affect your bank and your customers. Washington needs to understand that these types of efforts will hurt the banks that are making the majority of small business loans and that borrowers from every part of our society will suffer most.