Attention Small Business Lenders! The CFPB is Calling on You.
Update: The CFPB has extended the public comment deadline. Comments are now due by September 14. On May 10, the Consumer Financial Protection Bureau (CFPB) issued a Request for In…
Update: The CFPB has extended the public comment deadline. Comments are now due by September 14.
On May 10, the Consumer Financial Protection Bureau (CFPB) issued a Request for Information (RFI) seeking to learn more about the small business lending market. If you are scratching your head as to why the CFPB is delving into small business lending, you are not alone.
The CFPB was created to regulate those engaged in offering or providing consumer financial products or services. Yet tucked into the massive Dodd-Frank Act is a small provision, section 1071, which requires the CFPB to issue rules regarding the collection of data to help identify needs and opportunities in the small business lending market and to facilitate enforcement of fair lending laws. For many years, this provision has been a lower priority for the CFPB. However, with the issuance of many of the most high profile Dodd-Frank regulations, the CFPB is now beginning what is expected to be a multi-year process in developing rules for small business data collection.
Below, I attempt to flesh out a number of the issues being discussed in the aftermath of the CFPB’s latest action.
What is Section 1071 All About?
For those of you familiar with the data collection rules under the Home Mortgage Disclosure Act (HMDA) and the new rules published in 2015, section 1071 is described by some as a HMDA-like compliance requirement for small businesses. Section 1071 amends the Equal Credit Opportunity Act to require financial institutions to report information concerning loan applications made by women-owned, minority-owned and small businesses. The provision includes a partial list of information that is required to be collected such as the type and purpose of the loan, the amount of credit or credit limit applied for and the amount approved as well as the race, sex and ethnicity of the owners of the business. In adopting section 1071, Congress authorized the CFPB to write rules implementing the data collection requirement and provided for a catch-all provision for the inclusion of any additional information that the “Bureau determines would aid in fulfilling the purposes of [the] section.” In short, the data collection can be as extensive as the CFPB determines.
What is in the CFPB RFI?
The CFPB seeks information from the public in five broad categories: the definition of small business; the data points that the CFPB should require to be collected; the financial institutions engaged in business lending and what entities should be subject to data collection; the kinds of financial products and credit available to small businesses; and privacy concerns related to the collection effort. There are a host of sub-questions raised by the CFPB in each category. In addition, there are number of issues that the industry will likely want to address. For example, feedback is necessary to inform the CFPB on the data lenders are already collecting and what burdens and costs result when certain additional information is required. The small business lending market is remarkably diverse covering credit cards, SBA loans, personal loans, home equity loans as well as a combination of multiple sources. The RFI represents an important opportunity for industry participants to inform the CFPB before it begins its rulemaking process. Comments are due on July 14, 2017.
What are the Initial Reactions to the CFPB’s Action?
This depends on where you stand in the small business lending eco-system. Some lenders urged the CFPB to proceed with caution so as not to place considerable and unnecessary burdens on small businesses and lenders. A trade association representing a segment of the credit union industry argued that the CFPB should exempt all credit unions from any future rulemaking given their unique characteristics and limits placed on member business loans. Some industry folks are supporting a harder line stand arguing that Congress should take action to halt the collection effort. These stakeholders are supporting legislation in the House which contains a provision to repeal section 1071. On the other side, consumer advocates praised the CFPB’s actions to initiate the rulemaking process citing the need to provide greater transparency in small business lending trends that will encourage responsible lending practices and increase competition.
What are the Next Steps?
If you are an industry participant, you are encouraged to read the RFI and submit your comments to the CFPB. As I previously discussed, any final rule issued by the CFPB faces the threat of Republicans in Congress adopting a joint resolution to rescind the regulation. Yet nothing prevents the CFPB from moving forward with the pre-and proposed rule stages. While a final rule may still be few years away, it is important that compliance staff keep section 1071 regulations on their radar. Furthermore, rulemaking aside, the CFPB recently stated it is committed to keeping its eye on the industry as it will step up its focus on fair lending practices in the small business space.
Of course, our subject matter experts at FICO are always happy to assist with financial institutions with their small business challenges and help provide enhanced transparency to the lending process. Examples include FICO’s Small Business Scoring Service which offers a consistent and objective way to assess credit risk and our recently announced cloud-based small business origination solution, Origination Manager Essential, which automates the credit decision process and stores application information that could become the focus of future CFPB regulations.
Adding to your recommended reading load, you may also want to review the CFPB white paper on “key dimensions of the small business lending landscape.” Released at the same time as the RFI, the document contains a number of interesting industry statistics and market trends. However, the CFPB makes a point of underscoring the lack of data available to assess how well the market is meeting the needs of small businesses. If anything, this is yet another call for the industry to weigh-in with the CFPB. The good news is that you still have six weeks before the submission deadline.
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I further broke this down by looking at the characteristics of the youngest 15% in each group, which occurs at age 29 for the 750-799 group and 43 for the 800-850. We used FICO<strong>®</strong> Score 9 for our analysis, and examined typical variables of the categories that go into the make-up of the score.</p> <p><a href="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png"><img class="alignnone size-full wp-image-29367" src="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png" alt="fico-score-high-achiever-table" width="715" height="747" /></a></p> <p>Since there’s a lot to dissect in this chart, I’ll highlight a few findings that struck me: <ul> <li><strong>Credit history.</strong> Higher scores are undoubtedly associated with a longer time on file. What’s striking is the higher average time on file for the 800+ group, both overall and for revolving accounts (the most common trade line). 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