Senior Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce
December 07, 2021
Small businesses, including those that are women-owned and minority-owned, drive the American economy — and they rely heavily on access to credit to do so. Indeed, it is hard to overstate the importance of credit to these businesses: it allows them to support their inventory, finance their warehouses and offices, cover payroll, manage downturns, and otherwise push our economy and our nation forward. But a new rule put forth by the Consumer Financial Protection Bureau (CFPB) could make it harder for them to obtain a loan and might violate their privacy if the regulator overreaches.
The Consumer Financial Protection Bureau (CFPB) will soon require lenders to collect new information about the credit needs of small businesses. The rule would implement Section 1071 of the Dodd-Frank act, which will assist the government in enforcing the fair lending laws and better ensure women-owned, minority-owned, and small businesses have better access to credit.
The proposed rule would require covered financial institutions to collect and report data to the CFPB regarding certain applications for credit from small businesses. Some of the data points required by the statute include the type and purpose of the loan; the amount of credit; the race, sex, and ethnicity of the principal owners of the business; and the action taken with respect to the application.
One issue that has caused concern among small businesses is that the CFPB has proposed lenders guess or estimate a small businesses’ owner race based on visual observation if they opt not to report it voluntarily.
The U.S. Chamber of Commerce has supported the policy objectives of Section 1071 but has also encouraged the CFPB to avoid unintended consequences such as making it harder for small businesses to obtain a loan or jeopardizing the privacy of borrowers.
To encourage the reporting of data, the CFPB needs to protect the privacy of small businesses by implementing strong privacy guidelines. The CFPB should commit to providing small businesses, and the general public, the opportunity to comment on the “balancing test” it will use, including the risks and benefits it is weighing, before determining what information it will make publicly available on its website.
Additionally, lenders need to be provided with more time to comply with the CFPB’s rule. Currently, the rule proposes lenders will only have 18 months to implement technology solutions and train their employees, but most financial institutions are saying they need at least twice that time.
Given the importance of small businesses to the American economy, the CFPB should avoid implementing policies that would decrease lending options or increase the cost of credit for small businesses including those that are owned by women and minorities. A recent study found that if the number of people-of-color-owned firms was proportional to their labor force participation, the U.S. would add more than 1.1 million businesses, supporting an estimated 9 million additional jobs and adding nearly $300 billion in workers’ income.
The CFPB issued a report in September 2020 that found: “The Bureau expects that much of the variable cost component of ongoing costs would be passed onto small business borrowers in the form of higher interest rates or fees.” These variable costs imposed on lenders would include things like collecting data from applicants and ensuring it is reported accurately to the CFPB.
Ensuring that women and minority owned businesses have access to credit is an important policy goal. The Bureau should be careful, however, not to unintentionally undermine this objective.