Introduction
According to its statutory language, Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is designed to “facilitate enforcement of the fair lending laws and enable communities, government entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.”[1]
The law requires the Consumer Financial Protection Bureau (CFPB) to collect and publicly disseminate data on applications and loans to small businesses. It mandates the collection of demographic data and other data on the characteristics of small business applicants, the action taken on applications and the census tracts in which the small businesses operate.
The philosophy behind Section 1071 is similar to that of the Home Mortgage Disclosure Act (HMDA) data: the public release of data will identify which lenders are making good faith efforts to serve small businesses and which lenders lag their peers, encouraging the laggards through public accountability to increase their lending to traditionally underserved businesses. HMDA has had a significant impact on increasing home lending to people of color and modest-income borrowers, particularly in the years after 1989 when Congress mandated more demographic information in the HMDA data.[2] We expect a similar benefit from Section 1071 in narrowing the significant racial and gender disparities present in small business lending.[3]
Bills that Would Weaken Section 1071
H.R. 6732: The Small Lender Act: The bill would dramatically reduce the number of lending institutions that would report Section 1071 data, gutting its statutory purposes. In its proposed rule, the CFPB required lenders making more than 25 loans annually to report data. H.R. 6732 would raise this threshold to 500 annual loans that would need to be exceeded over two consecutive years.[4] Rep. French Hill (AR-02), the sponsor of the bill, and the bank trade associations supporting the bill claim that it will significantly reduce data collection costs for smaller lenders.
- Only a small minority of lenders would report data: The CFPB estimated that 70% of banks and savings and loans would be covered under the 25 loan threshold. This bill would drop coverage to less than one third of banks.[5] The resulting data would no longer enable the CFPB or the public to effectively monitor the fair lending performance of most banks, which directly frustrates the statutory purpose of Section 1071. In addition, assessing whether community needs are being met by lenders, which is the other major purpose of the law, would be thwarted in smaller cities and rural areas where these smaller loan volume banks are disproportionately located and have a significant market presence.
- Cost savings are minimal: The bank trade associations and the bill sponsors claim that data collection costs are so high that scores of community banks would cease making small business loans. This rhetoric glosses over the historical evidence. From 1996 through 2004, smaller banks were required to report CRA small business loan data. Their ranks were stable throughout this time period; data disclosure did not prompt widespread closures.[6] In addition, CFPB survey research reveals modest costs, which might cost borrowers from $7 to $30 in additional fees, minimal compared to the thousands of dollars of a typical loan. Lenders, including those from rural areas, told the CFPB that they were unlikely to exit the marketplace.[7] Finally, Community Development Financial Institutions (CDFIs), which are often smaller than community banks, already report this type of data to the CDFI Fund and do not find this reporting onerous.[8]
- Coverage of small business applicants would shrink: H.R. 6732 would also reduce the number of loans in the database by requiring that the data only be collected for small businesses with revenues of $1 million or less. The CFPB had proposed a threshold of $5 million, stating a “$1 million threshold…likely would not satisfy the Small Business Administration’s (SBA’s) requirements for an alternative size standard across industries and would exclude too many businesses designated as small under the SBA’s size standards.”[9] By eliminating too many businesses, H.R. 6732 would result in Section 1071 database not accurately revealing the experiences of small businesses applying for loans.
- Compliance date delayed: H.R. 6732 would delay the compliance date for three years after publication of the final rule in the Federal Register. The CFPB had proposed an 18 month time period. Congress passed Dodd-Frank and Section 1071 in 2010. Small businesses cannot afford to wait any longer for this important fair lending tool. Banks have had plenty of time to anticipate and plan for this data reporting requirement.
H.R. 6739: The Business Loan Privacy Act: Rep. Blaine Luetkemeyer (MO-03) erroneously maintained upon introduction of his bill that, “The Bureau refuses to tell us what information they will or will not make public, or even share how they plan to make that determination. Yet again, they are skirting the legal rulemaking process, this time threatening the privacy of small business owners across America.”[10] Section 1071 requires the CFPB to assess privacy risk, the possibility that the data could inadvertently identify a particular small business applicant, and modify the data accordingly before public release. This bill would require the CFPB to propose a rule and ask for public comment on its privacy protection procedures.
- The CFPB has already asked for comment on privacy issues: The bank trade associations and their members have had plenty of time to comment just as the rest of the public. The CFPB released its proposed rule in early September; comments were due on January 6, 2022. This is a four month time period, which is longer than most public comment periods. The CFPB also described privacy issues over about 100 double-spaced pages, providing plenty of information from which the public could judge and use in their comments. Another public comment period would not be productive and only further delay the rulemaking.
- Privacy risks are minimal: The federal agencies implementing HMDA data over more than 40 years have yet to report a single instance of a borrower’s identity being identified through use of HMDA data. The CFPB concluded that Section 1071 data would be very similar to HMDA data and would not pose a privacy risk.[11] In addition, just as with HMDA, some data points are likely to be modified upon public release to safeguard borrower privacy. Public sector datasets that advance a fair lending purpose have not led to identities being revealed. Lawmakers ought to focus more on private sector databases like Equifax, which revealed the identities of 143 million people through a hack of their database.[12]
H.R.6802: The Preventing Racial Profiling in Lending Act: Sponsored by Rep. Roger Williams (TX-25), this bill would prevent lenders from guessing upon visual observation the race or ethnicity of small business applicants in cases in which the applicants decline to provide this information.[13]
- This procedure has been part of the HMDA regulation for decades.[14] It is an attempt to provide more data on the race and ethnicity of the loan applicant. The CFPB discussed in its proposed rule that data collected in this manner would not be used to identify small businesses as minority-owned and that its purpose was to provide the public with more data on race and ethnicity of small business owners.[15] The agency also discussed whether data collected in this manner should be “flagged” or identified as collected in this manner in the database so members of the public could use it at their discretion.[16] This is not an attempt to racially profile borrowers. Stakeholders have legitimate differences of opinion regarding this particular procedure but its intent is not malicious as the title of the bill suggests.
Josh Silver is a Senior Policy Advisor at NCRC.
Photo courtesy of Shutterstock.
[1] Section 1071 – Small Business Data Collection, Public Law 111–203—July 21, 2010, Dodd-Frank Wall Street Reform and Consumer Protection Act.
[2] NCRC Comment On Proposed Section 1071 Small Business Lending Data Collection, January 2022, https://www.ncrc.org/ncrc-comment-on-proposed-section-1071-small-business-lending-data-collection/
[3] For information about racial and gender disparities in small business lending, see NCRC comment and Acting Comptroller Discusses Modernization of the Community Reinvestment Act, OCC News Release 2022-15, February 14, 2022, https://www.occ.gov/news-issuances/news-releases/2022/nr-occ-2022-15.html
[4] Press Release: Reps. Hill, Luetkemeyer, and Williams introduce bill to Protect Small Banks and Lenders, https://hill.house.gov/news/documentsingle.aspx?DocumentID=8895
[5] The CFPB estimated that a 100 loan threshold would result in about one third of banks reporting. Estimates were not provided for a 500 loan threshold. The public cannot readily estimate the impact of this dramatic proposal due to a lack of publicly available data, see CFPB Proposes Rule to Shine New Light on Small Businesses’ Access to Credit, Proposal Would Increase Transparency in a $2.4 Trillion Sector of the American Economy and Bolster Fair Lending, September 1, 2021, p. 239, https://files.consumerfinance.gov/f/documents/cfpb_section-1071_nprm_2021-09.pdf
[6] Josh Silver, Will Section 1071 Data Reporting Boost Lending To Underserved Small Businesses Or Lead To Consolidation And Reduce Product Choice?, NCRC, February 4, 2022, https://ncrc.org/will-section-1071-data-reporting-boost-lending-to-underserved-small-businesses-or-lead-to-consolidation-and-reduce-product-choice/
[7] CFPB proposed rule, pp. 739 and 748.
[8] Comment letter of HOPE Enterprise Corporation, pp. 13-14, https://www.regulations.gov/comment/CFPB-2021-0015-1557
[9] CFPB proposed rule, see above for link, p. 273.
[10] Press Release, Luetkemeyer, Hill, Williams Conduct Oversight of CFPB’s Small Business Data Collection, February 16, 2022, https://luetkemeyer.house.gov/news/documentsingle.aspx?DocumentID=400651
[11] CFPB proposed rule, pp. 607-609.
[12] Josh Silver, The Big Red Herring: The Home Mortgage Disclosure Act (HMDA) Will Help Predators Identify You!, NCRC, February 2018, https://ncrc.org/big-red-herring-home-mortgage-disclosure-act-hmda-will-help-predators-identify/
[13] Independent Community Bankers of America letter to Congress, February 2022, https://www.icba.org/docs/default-source/icba/advocacy-documents/letters-to-congress/letter-supporting-bills-to-modify-section-1071-proposal
[14] CFPB, Collection and Reporting of HMDA Information about Ethnicity and Race, January 2017, https://files.consumerfinance.gov/f/documents/201701_cfpb_hmda_ethnicity-and-race-collection_v2.pdf
[15] CFPB proposed rule, pp. 432-433, 446-449.
[16] CFPB proposed rule, p. 793.
