The "Consumer" in "Consumer Financial Protection Bureau" (CFPB or Bureau) gives some indication of the scope and focus of the CFPB's authority and regulatory efforts. However, since the CFPB's inception, small business lending has formed a gray area between the "consumer" and "commercial" spheres, particularly with regard to extensions of credit and credit reporting. Continuing its study of small business lending, the Bureau, at a field hearing in Los Angeles on May 10, announced its goal to create a small businesses financing project—an attempt to understand the small business lending market, which the CFPB describes as a $1.4 trillion industry. The announcement marks a continuation of the CFPB's work in implementing Section 1071 of the Dodd-Frank Act, which requires financial institutions to report information concerning credit applications made by women-owned and minority-owned small businesses.
As we have discussed previously, Section 1071 amended the Equal Credit Opportunity Act (which applies to any extension of credit, including extensions of credit to small businesses, corporations, partnerships, and trusts) by adding a provision requiring financial institutions to collect and maintain loan data for women-owned, minority-owned, and small business credit applicants. To facilitate its study of the small business lending market and implementation of Section 1071, the CFPB released a whitepaper and issued a request for information (RFI). The goals of the CFPB's research are to (1) define "small businesses" for lending purposes; (2) identify what small businesses seek; (3) what the categories of data that should be used to identify and regulate small business lenders; and (4) how regulators can ascertain privacy of consumer information.
Highlights From the Field Hearing:
The hearing featured speakers such as California State Attorney General Xavier Becerra and CFPB Director Richard Cordray. The speakers emphasized that small businesses play a key role in fostering community development and contribute to a large volume of the nation's job creation. According to the speakers, regulators should offer the same protections to small business owners that those seeking personal loans and mortgage loans enjoy.
The speakers emphasized that businesses need fair and equal access to credit to allow entrepreneurs to take advantage of opportunities for growth. Specific attention was drawn to the fact that small business lenders must maintain and report credit applications made by small businesses in order to (1) facilitate enforcement of fair lending laws, and (2) enable communities of women-owned and minority-owned small businesses to have access to resources.
For their part, small business representatives emphasized that regulators should implement better case management to make use of resources that already exist. Lenders suggested that better data transparency was needed to show which lenders are making loans to which groups. Indeed, the mere act of data collection is a powerful motivator to comply with fair lending and anti-discriminatory practices.
What information is required to be collected under Section 1071?
Section 1071 requires that certain data points be collected by financial institutions lending to women-owned, minority-owned, and small businesses, unless the CFPB deletes or modifies any of the data points due to privacy concerns. The statutorily mandated data points include:
- application number;
- application date;
- type and purpose of the financing;
- amount applied for;
- amount approved;
- type of action taken and action taken date;
- census tract of the principal place of business;
- gross annual revenue in the last fiscal year of the applicant preceding the date of the application; and
- information about the race, sex, and ethnicity of the principal business owners.
What information does the RFI seek?
Small Business Definition: While the Small Business Administration (SBA) uses industry-specific standards in defining the parameters of a small business, the Bureau is exploring alternative definitions. In formulating alternative definitions, the Bureau seeks information on challenges that small business have faced regarding the SBA's industry-specific definitions, and what definitions of "small business" financial companies use for internal reporting, including minimum and maximum thresholds and factors considered in internal definitions.
Data Points: Financial institutions are required to compile and submit data to the CFPB, including application information such as the type of financing, the amount applied for, the amount approved, and information about the race, sex, and ethnicity of the principal business owners. The CFPB is considering what other data it can collect to facilitate the enforcement of fair lending laws, and is soliciting information on what data collection standards are currently relied on by financial institutions.
Notably, the CFPB is also soliciting information on what concerns financial institutions have about the data points statutorily mandated by Section 1071. The CFPB is intending to explore what data points might be misinterpreted by companies, and what challenges financial institutions foresee in complying with these requirements for small businesses.
Financial Institutions Engaged in Business Lending: The CFPB seeks comment on whether financial institutions should be exempt from a small business lending data collection rule, or whether there are any sources that could inform the CFPB's decision to exempt certain classes. It also seeks to learn more about the roles of lending marketplaces (i.e., brokers) in the small business application process.
Access to Credit and Financial Products Offered to Businesses: The Bureau seeks information on what business credit products are currently offered to small businesses, and what the most important sources of financing for small businesses are. The CFPB wants to know under what circumstances would preapproval and credit reviews occur with respect to small businesses, and what information is collected as part of these reviews. Finally, the CFPB wants to know what obstacles women-owned and minority-owned small businesses face when attempting to access credit.
Privacy: The Bureau seeks to understand what privacy-related concerns both credit applicants and financial institutions have with respect to making data available to other institutions and the public generally. It especially wants to know if releasing any of the statutorily mandated data points risk the confidentiality of the small business or its owner.
In total, the RFI poses 17 questions to industry participants. Responses and comments are due by July 14, 2017. Stay tuned as the CFPB presses forward regarding small business lending.