At a time of growing threats to privacy and security in an increasingly plugged-in world, a new federal regulation threatens to make the problem worse for the residents and small businesses of Red Bay and other communities nationwide. The Consumer Financial Protection Bureau recently finalized a rule that will require financial institutions — including Community Spirit Bank — to burden small-business customers with invasive questions and then publicly report the data they collect to the federal agency.
Policymakers in Washington should step in to block this misguided rule given its harmful impact on privacy and its potential to restrict access to credit to the small businesses that drive the nation’s economy, particularly the women- and minority-owned businesses this rule is designed to help.
Big Rule for Small Businesses
The CFPB’s new rule implements a section of federal law requiring lenders to collect and report data on credit applicants. The law specifies several data points financial institutions must compile on applications from women-owned and minority-owned businesses, including the race, sex and ethnicity of the principal owners as well as gross annual revenue.
While these requirements are mandated by Section 1071 of the Dodd-Frank Act of 2010, the CFPB has the authority to exempt any class of financial institutions from the standards it develops and to limit mandatory data points to those required by the law. Unfortunately for applicants served by community banks — which make roughly 60% of the nation’s small-business loans and are leaders in meeting the credit needs of women- and minority-owned businesses — the CFPB has opted to apply the rule to the vast majority of local financial institutions and the businesses they serve. And the data points it requires these institutions to collect and report far exceeds those required by law, compounding its impact on small businesses and community banks.
Harming Local Economies
The CFPB’s rule will have a substantial negative impact on small-business lending for several reasons.
First, the rule raises significant concerns about the privacy of applicants for commercial credit, particularly in smaller communities and rural areas. Community bankers are concerned for small-business customers that are the only business of their type in their local community, such as the town dentist or auto repair shop — a significant concern in Red Bay and communities like it. Requiring financial institutions to collect and report data on loan applicants will make it possible for them to be identified, potentially driving small businesses away from community banks and local communities.
Second, the CFPB’s rigid data collection requirements will hamper the ability of Community Spirit Bank and other community banks to tailor loans to meet the unique needs of local businesses, which is a hallmark of relationship-based lending. While community banks look at each small business individually and make highly customized loans based on numerous borrower characteristics and market variables, the Section 1071 rule requires a homogenized approach that will degrade their ability to offer small businesses the type of credit they need in a timely and efficient manner. Small-business lending is not and should not be a commodity.
Third, these requirements and their chilling effect on small-business lending will ultimately harm the borrowers the bureau is trying to help — women-owned and minority-owned businesses. These mandates would compound the regulatory and paperwork burdens that disproportionately affect community banks, limiting their ability to make small-business loans. By targeting the community banks that are outpacing larger institutions in serving minority and women borrowers, the CFPB’s self-defeating rule threatens to undermine a part of the banking sector that is working as it should.
With the U.S. Supreme Court considering a case challenging the constitutionality of the CFPB’s funding structure, the bureau should first issue a stay on the rule’s effective date until the high court issues a decision, which will likely come next year. Meanwhile, the CFPB should use its authority to exempt more community banks and small businesses from its rule and limit mandatory data points to those required by law. Finally, Congress should step in and pass legislation to eliminate these harmful requirements once and for all.
Community bank small-business lending is a complex process that cannot be commoditized like consumer or mortgage lending, which would have a chilling effect on access to credit, particularly for the borrowers Washington is seeking to help. To avoid disadvantaging small businesses in local communities, including right here in Red Bay, Washington should suspend and ultimately block this misguided policy.
Let Congress know that you want to support local small businesses by sending your senator or representative a letter about Section 1071. Find your local congressman here: https://www.congress.gov/contact-us
Brad Bolton is president and CEO of Community Spirit Bank in Red Bay and the immediate past chairman of the Independent Community Bankers of America.