Many credit unions and small lenders in Indiana and beyond are raising concerns about a proposed federal rule that would require lenders to collect and report a wide range of demographic, geographic and other data about applicants for small business loans. businesses.
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 who are small organizations themselves.
More than 2,100 entities submitted public comments on the CFPB’s proposed rule. Among them is Jean Wojtowicz, executive director of the Indiana Statewide Certified Development Corp, based in Indianapolis.
Wojtowicz called the proposed rule unnecessary, particularly because lenders who participate in Small Business Administration loan programs are already required to collect demographic information about borrowers.
“It would be a pretty significant additional lift in a way that doesn’t add any additional value,” Wojtowicz said.
The Indiana Statewide CDC partners with conventional banks to provide financing for small businesses through the SBA’s 504 loan program. Typically, half of the funding for each transaction comes from a bank, 40% from Wojtowicz’s organization and 10% from the borrower.
The Indiana CDC is one of approximately 300 community development corporations in the United States. Many of them, Wojtowicz said, have only a handful of employees.
Requiring these smaller organizations to comply with this rule, she said, would create additional work that could reduce the number of loans they are able to make. “It’s just an additional regulatory burden that will prevent them from lending more to small businesses.”
As proposed, the CFPB rule would require lenders to collect a dozen different data points from their small business credit applicants. This data would include whether the business is female or minority owned, where it is located, gross annual revenue of the business and actions taken on the application, among others.
Mike Murphy, vice president of business services at the Indianapolis-based Indiana Members Credit Union, said compliance with the proposed rule would require spending on training, software and reporting.
“We do not support additional regulatory requirements that only increase the cost of borrowing for our members and slow down the process,” Murphy told IBJ via email, adding that if the rule passes, the credit union will comply. .
Indiana Members Credit Union, one of the largest credit unions in the state, has $3 billion in assets and 32 full-service locations statewide. Murphy said small business loans make up about 25% of the credit union’s loan 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 goal of lending fairly to all types of businesses,” McKenzie told IBJ. “We just don’t agree with this particular approach.”
McKenzie said credit unions, by their very nature, already practice fair lending because they belong to their members and exist to meet the needs of their business and individual members.
The burden of complying with the CFPB’s proposed rule, including staff time and computer programming expenses, would disproportionately hurt smaller credit unions, McKenzie said.
For this reason, the ICUL asked the CFPB to consider changing 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 initiated at least 25 credit transactions for small businesses. companies in each of the past two years.
McKenzie said his organization supports increasing those requirements to only apply to lenders who make at least 500 small business loans a year. ICUL also supports 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 so, at least set some criteria so that it only applies to the bigger ones,” McKenzie said.
Not everyone is against the proposed rule.
“We broadly support the proposal,” said Michelle Harati, Washington, D.C.-based senior policy officer for Local Initiatives Support Corp.
Based in New York, LISC is a nonprofit, certified financial institution for community development with offices in 38 cities, including Indianapolis. The organization’s community development activities include small business loans, affordable housing initiatives, and economic development efforts.
Harati agreed that much of the data included in the CFPB’s proposed rule is already reported or captured by many financial institutions, but she said having the data in a single database would make it easier to identify. and addressing lending disparities.
The data, for example, could reveal a shortage of small business loans in rural areas, Harati said. Once these disparities are identified, organizations like LISC can offer strategies to close these gaps.
The CFPB proposal would make the data collected available to the public on an annual basis.
Harati said she favors keeping the threshold of 25 transactions per year. Increasing it, she said, would ultimately make the database less useful.
“If we increase [the threshold], this will significantly reduce the number of banks covered,” she said. “If we want to accurately measure access to credit and fair lending, we need hard data.”
The comment period ended on January 6, and the CFPB is now considering those comments as it works to formulate its final rule. The Public Register does not say when the final rule might be published, although trade publication American Banker said it should happen next year.•