CFPB Lending Rule ‘Unnecessarily Far-Reaching’, Banks Claim

A new rule supporting fair lending to small businesses could harm relationship banking and is “unnecessarily far-reaching”, according to the American Bankers Association (ABA).

The Consumer Financial Protection Bureau (CFPB) last week finalized the implementation of Section 1071, aimed at increasing transparency in small business lending and promoting fairness.

The rule was brought in partly to address issues encountered during the rollout of the Paycheck Protection Program during the Covid-19 pandemic, which included many small businesses struggling to access emergency credit when forced to close due to lockdowns.

While supporting the rule’s aims, the ABA’s president and CEO Rob Nichols said the organization was “disappointed that it remains unnecessarily far-reaching and will harm the relationship banking model [CFPB] Director [Rohit] Chopra often praises — the model that community banks have relied on to meet the unique needs of small businesses in their communities”.

Nichols added: “Given the cost of implementing these significant new reporting requirements and their impact on lending, some community banks may be forced to limit their small business loan programs.

“Non-banks — many not supervised for compliance by the Bureau — may absorb some of the small business lending done today by banks, but they will not be able to offer their customers the benefits of a banking relationship and the technical assistance banks provide to their small business customers.”

He also expressed concern that companies’ privacy could be compromised by the data reporting requirements while also painting “an incomplete and potentially misleading picture of small business lending to underserved groups”.

Rebeca Romero Rainey, CEO and president of the Independent Community Bankers of America, said her members were “deeply frustrated” that the new rule would “burden millions of small business customers with invasive questions about their business and livelihood”, as well as significantly increase the compliance burden on small community banks.

The CFPB had “dramatically exceeded the clear letter of the law”, she argued, going far beyond what the Section 1071 changes were designed to do.

“As relationship bankers, community banks look at each small-business loan individually and often in customized terms based on many factors,” Rainey said. “The CFPB’s rigid data collection requirements will hamper the ability of community banks to tailor loans to meet the unique needs of local businesses.”