Many credit unions and small lenders in Indiana and beyond are voicing concerns about a proposed federal rule that would require lenders to collect and report a wide array of demographic, geographic and other data about small-business loan applicants.
The Consumer Financial Protection Bureau, which introduced the proposed rule in September, says the rule would create the nation’s first comprehensive database of small-business credit applications. The CFPB says the database would both help regulators enforce fair-lending laws and help identify needs and opportunities for small businesses.
But skeptics say the rule duplicates existing efforts while placing an undue burden on lenders, especially those that are themselves small organizations.
More than 2,100 entities have submitted public comments about the CFPB’s proposed rule. Among them is Jean Wojtowicz, executive director of the Indianapolis-based Indiana Statewide Certified Development Corp.
Wojtowicz called the proposed rule unnecessary, especially because lenders who participate in the Small Business Administration’s loan programs are already required to collect demographic information on borrowers.
“It would be a pretty significant additional lift in a way that adds no additional value,” Wojtowicz said.
The Indiana Statewide CDC partners with conventional banks to provide financing to small businesses through the SBA’s 504 loan program. Typically, half of the financing in each deal comes from a bank, with 40% coming from Wojtowicz’s organization and 10% coming from the borrower.
The Indiana CDC is one of about 300 U.S. community development corporations. Many of them, Wojtowicz said, have only a handful of employees.
Requiring those small organizations to comply with this rule, she said, would create extra work that could lessen the number of loans they’re able to extend. “It’s just an additional regulatory burden that will keep them from doing more lending to small businesses.”
As proposed, the CFPB rule would require lenders to collect a dozen different data points from their small-business credit applicants. That data would include whether the business is woman- or minority-owned, where it’s located, the business’s gross annual revenue and what action was taken on the application, among other things.
Mike Murphy, vice president of commercial services at Indianapolis-based Indiana Members Credit Union, said complying with the proposed rule would require spending on training, software and reporting.
“We are not in favor of additional regulatory requirements that simply add to the cost of our members’ borrowing, and slow down the process,” Murphy told IBJ via email, adding that, if the rule passes, the credit union will comply with it.
Indiana Members Credit Union, one of the state’s largest credit unions, has $3 billion in assets and 32 full-service locations around the state. Murphy said small-business loans make up about 25% of the credit union’s lending portfolio.
Indiana Credit Union League President John McKenzie, who submitted public comments on behalf of his organization, also said the rule would duplicate existing data-collection activities and place an undue burden on lenders.
“We agree with the objective of fair lending to all types of businesses,” McKenzie told IBJ. “We just disagree with this particular approach.”
McKenzie said credit unions, by their very nature, already practice fair lending because they are member-owned and exist to serve the needs of their business and individual members.
The burden of complying with the proposed CFPB rule, including the staff time and computer programming expenses, would disproportionately hurt small credit unions, McKenzie said.
For that reason, the ICUL has asked the CFPB to consider altering the threshold at which lenders would be required to comply with the rule.
As proposed, the CFPB rule would apply to banks, credit unions, online lenders, community development financial institutions, finance companies and other lenders that have originated at least 25 credit transactions for small businesses in each of the past two years.
McKenzie said his organization favors upping those requirements to apply only to lenders that originate 500 or more small-business loans per year. The ICUL also favors a reporting exemption for credit unions with less than $600 million in assets.
“We don’t think [the proposed rule] should apply at all to credit unions. But if it is going to, at least set some criteria so that it applies only to the largest,” McKenzie said.
Not everyone is against the proposed rule.
“We’re broadly supportive of the proposal,” said Michelle Harati, a Washington, D.C.-based senior policy officer for the Local Initiatives Support Corp.
Based in New York City, LISC is a not-for-profit and a certified community development financial institution with offices in 38 cities, including Indianapolis. The organization’s community development activities include small-business lending, affordable-housing initiatives and economic development efforts.
Harati agreed that much of the data included in the CFPB’s proposed rule is already being reported or captured by many financial institutions—but she said having the data in a single database would make it easier to identify and remedy lending disparities.
The data, for instance, might reveal a dearth of small-business lending in rural areas, Harati said. Once those disparities are identified, organizations like LISC can come up with strategies to fill those gaps.
The CFPB’s proposal would make the collected data available to the public on an annual basis.
Harati said she favors keeping the 25-transactions-a-year threshold in place. Upping it, she said, would ultimately make the database less useful.
“If we increase [the threshold], that’s going to dramatically decrease the number of banks that are covered,” she said. “If we want to accurately measure access to credit and fair lending, we need robust data.”
The comment period closed Jan. 6, and the CFPB is now considering those comments as it works to formulate its final rule. The public docket does not indicate when the final rule might be issued, though the trade publication American Banker has reported that it’s expected to happen next year.•