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As many of you are aware, Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amends the Equal Credit Opportunity Act (ECOA) to require financial institutions to compile, maintain, and submit to the CFPB certain data on credit applications by women-owned, minority-owned, and small businesses. This is one of the last remaining required rulemakings in the Dodd-Frank Act. You may also recall that at Director Cordray was criticized at a recent House Financial Services Committee hearing by Chairman Hensarling for not proceeding more quickly to issue a regulation implementing Section 1071.
Yesterday was the first public proceeding to move forward the implementation of Section 1071. The agency did not initiate a rulemaking or SBREFA panel, but instead issued a White Paper, and a Request for Information (RFI) regarding the small business market.
The hearing, the white paper, and the RFI gave us insights into where the CFPB might be headed and what this might mean for credit unions. The takeaways:
Because the CFPB issued an RFI instead of a rule or initiating the formal rulemaking process, a final rule will not come any time soon, perhaps another year or two (and there may be a new director by then);
The CFPB is struggling with the magnitude of the potential rulemaking given the various types of lenders and products that potentially fall within the scope (even beyond banks and credit unions);
The CFPB is struggling with the definition of “small business” and how to define a commercial loan for purposes of the rulemaking, all of which will have a dramatic impact on the potential reach of the rule; and
The breadth and impact of the rule could potentially be massive and a be a significant burden on credit unions (i.e. a HMDA type data collection for commercial loans) given the purpose of the rule and what the CFPB has indicated it wants to accomplish.
As far as the specific data that the rule might encompass, there appear to be three different buckets that will be the focus of the data collection:
Data on markets (such as being able to determine the extent to which there has been a net decline in small business lending as opposed to a shift from banks to alternative lenders during the recession (or simply a decrease in lending), the degree to which supply and/or demand may have contributed to whatever decline in small business lending has occurred or whether the relative importance of either supply or demand varies for different types of businesses, including women- and minority-owned small businesses);
Data for use by the public for the purposes of enabling communities, government entities, and creditors to identify business and community development needs and opportunities of women-owned, minority owned and small businesses.; and
Data for the enforcement of fair lending laws, to understand the nature and extent of the potential disparities, and to ensure women-owned and minority-owned businesses have non-discriminatory access to capital.
Sharon Lindeman, vice president of regulatory advocacy for the California and Nevada Credit Union Leagues, was present at the hearing and asked the CFPB to proceed with caution when it comes to drafting a definition for small businesses and small business loans, and to limit data collection to the elements specifically required by the Dodd-Frank Act and urged them to use their specific exemption authority under 1071 for credit unions.
CUNA has been engaged with the CFPB on this issue for some time and will continue to urge the CFPB to tailor any data collection for credit unions. The Financial Choice Act also contains a provision eliminating the data collection authority as well. We note the irony (or perhaps tragedy) that the very small businesses the CFPB is charged with helping by statute (yes, this includes credit unions), are potentially subject to a regulatory burden that hampers them from engaging in the activity the statute is seeking to encourage.
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