CFPB's small business data collection rule hits banks at 'the worst time,' analysts say

The Consumer Financial Protection Bureau is expected to come out with a rule this week that will require banks and other lenders to collect data on small businesses that apply for loans. The long-anticipated rule — one of the last unimplemented provisions of the Dodd-Frank Act — comes at a particularly bad time for community and regional banks amid expectations of a pullback in credit this year. 

"This is the worst time ever for doing anything new," said Ken Thomas, founder and CEO of Community Development Fund Advisors in Miami and an expert on the Community Reinvestment Act. "A recession likely will start later this year and go into 2024, but at some point this rule has to be done." 

The CFPB is required to issue the small business data collection rule by Friday. The bureau was sued in 2019 by a consumer advocacy group, the California Reinvestment Coalition, for failing to complete the rule after nearly a decade. The bureau agreed under a court-supervised settlement to issue the rule by March 31. A House subcommittee on Tuesday will hold a hearing on the rule, which is known as section 1071 of Dodd-Frank.

When the COVID-19 pandemic hit, the importance of collecting data on small businesses became clear. As banks and other lenders were rushing to provide loans through the Paycheck Protection Program, the federal government had — and still has — little visibility into the credit needs of small businesses, experts say. 

"Without this information, policymakers are flying blind on the needs of small business owners — relying on surveys and anecdotal data — for a crucial part of the economy," said Karen Mills, a senior fellow at Harvard Business School and former head of the Small Business Administration under President Barack Obama. 

In 2021, the CFPB released its proposal requiring that data be collected on a wide range of small business credit products including term loans, lines of credit, credit cards and merchant cash advances. The final rule will go into effect in July 2024, or 18 months after it is published in the Federal Register. 

Government and state entities may use the data to determine if a lender is discriminating against real or potential borrowers. Lenders face even bigger risks if they are found to have violated fair lending laws or the eventual public release of the data sparks a backlash by consumers. Financial firms have never been required to collect data on small businesses and have pushed back on doing so, claiming it requires too much paperwork and is a regulatory burden. 

"So much small and business lending is done by community banks and they are opposed to this because they don't want to take the time to collect the data and what it might show," said Thomas, who taught finance at the University of Pennsylvania's Wharton School for over 40 years and is the author of "The CRA Handbook."

Large banks such as Bank of America and JPMorgan Chase are among the largest lenders to small businesses, while a host of other companies — including Enova International and PayPal — are vying to originate loans as well. The number of small businesses rose 2.1% last year to 33.2 million compared with a year earlier, according to the Small Business Administration. 

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Community advocacy groups are already planning to use the data when it is finally published to publicize which banks are doing a poor job of lending to Black- and Hispanic-owned small businesses.

The data imposes its own "market discipline," Thomas said, and is similar to mortgage lending data collected under the Home Mortgage Disclosure Act.

"As a banking analyst, I always love more data, and more data is always better," said Thomas. "But for banks, they don't want to provide more data because this is like HMDA for small business lending. HMDA made banks better in terms of serving their community."

The small business data collection rule has gone through several changes.

Under the Trump administration, small community banks won a reprieve in 2020 from former CFPB Director Kathy Kraninger, who indicated the CFPB would relieve lenders that had fewer than $100 million or $200 million in assets from the reporting requirements. But former acting CFPB Director Dave Uejio reversed course with the 2021 proposal. Lenders that originate at least 25 small-business loans will have to report the data on credit applicants.

"We don't know enough about whether small businesses have fair access to the capital they need to generate new jobs and grow the American economy," Uejio said in September 2021, when the plan was announced.  

 It is unclear yet if the CFPB will face opposition to the final rulemaking. The current bank liquidity crisis sparked by the failures of Silicon Valley Bank and Signature Bank this month likely means a pullback in lending this year and in 2024. Bankers and a few Republican lawmakers have suggested that the data collection rule is overburdensome and should not go into effect at all.

An early issue that held up the rulemaking was the conflict between Dodd-Frank and the Equal Credit Opportunity Act that banned the collection of some data. In the end, Dodd-Frank amended the ECOA to require that financial institutions collect the data on applications for credit for women-owned, minority-owned, and small businesses.

"It is critical to have data on the current levels of credit being extended to small business owners in order to identify and fill market gaps," Mills said.