Banking

CFPB data collection plan may be too costly for some banks, credit unions

Credit unions and banks serving local community institutions could abandon small-business lending efforts because of the potential cost of complying with the Consumer Financial Protection Bureau’s data collection plan.

The CFPB wants to spot patterns of discrimination and bias in small-business lending by requiring depository institutions and nontraditional lenders to collect and report data to the agency. The plan was originally released on Sept. 1 and drew immediate pushback from lenders that thought it would be too costly to implement, with many saying the proposed rule would disproportionately affect small institutions that lack the resources to comply with the reporting requirements.

Since then, the rule has amassed over 2,100 comments from trade groups like the National Association of Federally-Insured Credit Unions and the Credit Union National Association, which call for changes in its scope. A final rule is expected to be published in 2023.

Dale Baker, the regulatory affairs counsel for NAFCU, explained that the minimum threshold of 25 covered credit transactions and high gross annual revenue to determine covered small businesses — those with $5 million or less in gross annual revenue for the previous year — would disproportionately affect smaller credit unions that don’t have the economies of scale to accommodate new reporting requirements.

“You have smaller [credit unions] that could be offering a very small suite of business products, but quickly run over that cap of 25,” requiring them to retrain staff on how to gather the newly required information on the race and ethnicity of applicants, Baker said. “You’re talking about adding headcount where it’s really not possible and you’re talking about, in a lot of ways, disincentivizing credit unions from offering certain products.”

Jeff Dick (left), CEO MainStreet Bank; and Alexander Monterrubio, senior director of advocacy and counsel for CUNA. “There will likely be institutions out there that decide to reduce their offerings to small businesses because being subject to the … rule is just too costly,” Monterrubio said.

The Federal Deposit Insurance Corp. said Tuesday that just 30% of small-business owners who sought traditional financing in 2021 received the full amount of funding they originally wanted, down from 36% in 2020 and 51% in 2019.

To help smaller institutions to meet the requirements set forth in its proposal, the CFPB aims to provide resources such as a rule summary, a compliance guide, and model forms that will help lenders determine whether or not they are required to report.

The CFPB likened the collection of information — which is required under Section 1071 of the Dodd-Frank Act — to the data reported under the Home Mortgage Disclosure Act. The regulator’s overall goal for the proposed rule is to facilitate fair lending practices, while also helping communities and lenders identify small-business credit needs, according to a CFPB spokesperson.

But the CFPB’s proposed guidelines for eligibility would cover institutions that are normally exempt from HMDA reporting.

The impact that data collection and reporting would have on credit unions who have little to no experience with regulations like HMDA would dissuade them from offering services to small-business clients, according to Alexander Monterrubio, senior director of advocacy and counsel for CUNA.

For many, “this could be their first time encountering a data collection of this complexity,” Monterrubio said. “There will likely be institutions out there that decide to reduce their offerings to small businesses because being subject to the Section 1071 rule is just too costly.”

In addition to training staff and ensuring that core systems can handle the accumulation and secure storage of new data, the willingness of applicants to divulge personal information related to their sex and ethnicity could also affect credit unions’ decision to pursue such lending efforts.

Dale Hansard, chief executive of the $38 million-asset Caprock Federal Credit Union in Lamesa, Texas, explained that in speaking with members — of which roughly 70% are considered minorities — many were uncomfortable with providing details about their race in applications for loans.

“When we did the Paycheck Protection Program loans, we were seeing several applicants coming in without putting down anything for their ethnicity and saying ‘I don’t want to disclose that,’ ” Hansard said.

As the credit union begins offering commercial and small-business loans, it will continue to examine the CFPB’s proposal to guide the development of Capcom’s new program, Hansard said.

“What’s nerve-wracking in trying to get it right to begin with is that you can’t even start a program or make it worthwhile with anything less than 25 loans … so you’re going to have to hit that threshold to make it worth putting pencil to paper,” Hansard said.

Banking organizations like the Independent Community Bankers of America have also expressed concerns about how the proposal would burden community institutions and small businesses receiving credit.

Many of the approximately 5,000 community banks nationwide use lending programs tailored to local businesses as niche offerings to provide them with access to credit, according to Paul Merski, executive vice president of congressional relations and strategy for the ICBA. Banks could be forced to standardize offerings to offset the costs that come with reporting requirements.

“Mortgage lending is pretty systematic and standardized, whereas small-business lending [can be] very specialized and very unique … if you increase the cost significantly, you’ll have more community banks doing more standardized, small-business loans,” which will end up being counterproductive to helping provide credit to small businesses, Merski said.

The CFPB included within its proposal a provision that would grant the lender the ability to determine the race and ethnicity of an applicant’s principal owner using visual observation and the provided surname while meeting either in person or virtually. With regards to sexual identity, applicants would have the privilege to self-describe in place of or in addition to selecting male or female.

With a heightened scrutiny of the accuracy of reported data, credit unions and banks worry that using visual appearance and last names to determine the race and ethnicity of applicants could lead to incidents of misreporting and penalties from the CFPB.

“We’re trying to be as efficient as we possibly can, and we try to use technology as best we can, but we’re also in a very high-cost operating area,” said Jeff Dick, CEO of the $1.7 billion-asset MainStreet Bank in Fairfax, Virginia. “Every person that we have still matters.”

The CFPB is planning to make the reports available to the public on an annual basis, pending the adjustment or redaction of sensitive materials that will be determined through a “balancing test” to assess the risks and benefits of public disclosure.



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