Yesterday, I attended the CFPB’s field hearing in Los Angeles on small business lending. In connection with the hearing, the CFPB issued a white paper entitled “Key dimensions of the small business lending landscape,” together with a request for information (RFI) on the small business lending market.
On July 11, 2017, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “The CFPB and Small Business Lending: What You Need to Know.” Click here to register.
Field Hearing. The field hearing began with introductory remarks from Los Angeles City Attorney Mike Feuer, California Department of Business Oversight Commissioner Jan Owen, and California Attorney General Xavier Becerra, all of whom expressed support for Director Cordray and opposition to ongoing efforts to rein in the CFPB. Notably, Mr. Becerra confirmed that he intends to engage in robust and aggressive consumer protection efforts, including using the investigative authority of his office “to the hilt.”
Director Cordray then delivered prepared remarks concerning the CFPB’s small business data collection efforts pursuant to Section 1071 of the Dodd-Frank Act. In addition to discussing the data collection initiative, Director Cordray opined that the line between consumer and small business lending is often “blurred,” and made a number of other statements suggesting (but not directly stating) interest in regulating small business lending. Perhaps hinting at a run for Governor of Ohio, Director Cordray spent a fair amount of time lauding an Ohio loan subsidy program he operated as Ohio State Treasurer, claiming it has been successful in facilitating lending to small businesses.
Director Cordray’s remarks were followed by a panel discussion led by Acting Deputy Director David Silberman and CFPB representatives Grady Hedgespeth and Cheryl Parker Rose. The individuals providing testimony were: Elba Schildcrout, East Los Angeles Community Corporation; Makini Howell, Main Street Alliance; Josh Silver, National Community Reinvestment Coalition; Kate Larson, U.S. Chamber of Commerce; Todd Hollander, Union Bank; and Robert Villarreal, CDC Small Business Finance. Conspicuously absent from the panel was a representative of nonbanks providing financing to small businesses.
White Paper and RFI. As it did in its annual fair lending report issued last month, the CFPB states in the white paper and RFI that it is in the early stages of its work to develop regulations implementing Section 1071, with such work currently focused on outreach and research. Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses such as the race, sex, and ethnicity of the principal owners of the business. In the white paper, the CFPB discusses the initial findings of its research into the small business lending market. In the RFI, the CFPB seeks comment on a series of questions ” to enhance [its] understanding of the small business lending market in order to prioritize and guide research and policy development work for implementation of section 1071.”
The white paper includes:
- An overview of the small business market, including the size of the overall market and the size of women-owned and minority-owned small businesses using SBA standards for qualifying a business as “small”
- A discussion of the types of financing products available to small businesses, the types of financial institutions that provide such financing, and data showing the distribution of small business lending among types of lenders and financing products
- An analysis of the availability of small business financing during and since the recession began in 2007
It appears that a primary objective of the white paper is to confirm that the data collection mandated by Section 1071 is needed. (The ECOA amendment would be repealed by the CHOICE Act bill recently passed by the House Financial Services Committee.) Throughout the white paper, the CFPB points out the limitations of currently available small business lending data on its ability “to assess how well the market is meeting the needs of small businesses.” According to the CFPB, Section 1071 data can support efforts to increase credit access in communities with unmet needs by providing “an understanding of the small business credit flowing into their local communities, and allow[ing] them to identify ‘credit deserts’ or sectors where credit flows may be restricted.” The CFPB also notes the role of Section 1071 in “facilitating the enforcement of fair lending laws,” by providing the data needed “to understand the nature and extent of potential disparities, and to ensure women-owned and minority-owned businesses have non-discriminatory access to capital.”
The RFI contains a series of questions divided into five categories as follows:
- How “small business” is defined. The CFPB notes that Section 1071 defines “small business” as having the same meaning as “small business concern” in Section 3 of the Small Business Act. Section 3 gives the Small Business Administration (SBA) authority to set size standards that meet certain statutory criteria. However, as the CFPB also notes, Section 3 allows the SBA to approve size standards developed by other federal agencies that meet certain requirements. The CFPB indicates that it is exploring the development of an alternative “small business” definition tailored to the needs of Section 1071.
- Data points. In addition to requiring the collection of specified data, Section 1071 authorizes the CFPB to require the collection of additional data that it determines “would aid in fulfilling the purposes of [Section 1071].” The CFPB seeks information on issues such as what data financial institutions are currently collecting on small business lending, how such data overlaps with the data required to be collected under Section 1071, and what concerns and challenges are raised by the Section 1071 required data.
- Types of financial institutions engaged in small business lending. Noting its authority under Section 1071 to exempt certain classes of financial institutions from a small business lending data collection rule, the CFPB asks several questions regarding its use of such exemption authority. It also asks about “the roles of lending marketplaces, brokers, dealers and other third parties in the small business lending application process.”
- Access to credit and financial products offered to small businesses. The CFPB notes that “term loans, lines of credit, and credit cards are the principal all-purpose products used by small businesses” and “estimates that these products collectively comprise about three-fourths of the non-equity financing market, when excluding supplier financing.” The CFPB asks questions regarding the types of business credit products offered to small businesses, the application process, and credit reviews on an existing credit facility.
- Privacy. Noting its authority under Section 1071 to delete or modify publicly available data to advance a privacy interest, the CFPB asks questions regarding the nature of privacy concerns of applicants and financial institutions related to the potential disclosure of Section 1071 required data and steps the CFPB can take to mitigate such concerns.
Comments in response to the RFI must be received on or before 60 days after the RFI is published in the Federal Register.