Feds are Breaching Small Business Privacy via Loans

By: Denise Simon | Founders Code

Banks and other lenders are about to be forced to be federal agents… it goes beyond banks and lenders by the way… it includes payday retail and pawn shops.

The Consumer Financial Protection Agency is drafting rules to require banks and lenders to collect demographic information from small-business-loan applications — a process that has taken more than a decade.

But a group of Democratic senators has raised concerns over the new rule even as they urged the agency to issue a final rule quickly, according to a Jan. 13, 2022 letter. That letter was signed by Small Business & Entrepreneurship Committee Chair Ben Cardin, D-Md., Senate Committee on Banking, Housing and Urban Affairs Chair Sherrod Brown, D-Ohio., Ron Wyden, D-Ore., Dick Durbin, D-Ill., and Cory Booker D-N.J.

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“For years, we have pushed the CFPB to move forward on this important rulemaking, and we are pleased that you are doing so now. It is the CFPB’s responsibility to carry out this mandate by issuing a final rule as soon as practicable,” the senators wrote in the letter.

At issue is a provision from The Dodd-Frank Act, which Congress passed in 2010, required that lenders collect such demographic data, including business ownership by race and gender, in an effort to track the lending environment for small businesses. The CFPB ultimately issued a proposed rule in 2021, with comments due Jan. 6, 2022. The agency received more than 2,100 comments, according to Regulations.gov, including from banking industry groups that believe the new rule is too onerous, to lending advocacy groups that feel the new rule does not do enough to ensure the data collected will show a full picture of small business lending.

The senators said that, while the agency’s decision to define a small business as one having $5 million or less in annual revenue and include a 25-loan origination threshold to help narrow reporting categories to a manageable amount,  the decision to exclude credit transactions such as consumer credit cards used for business purposes and leases will leave gaps in the reporting that will weaken the data collected.

“We are concerned that these exclusions would lead to a gap in our understanding of the small business lending marketplace and whether entities are in compliance with fair lending laws. These types of credit are often utilized by underserved borrowers because they offer easier access to capital,” the senators wrote.

The senators also pushed back on CFPB’s proposed “balancing test” to asses the risks and benefits of public disclosure of the data, calling it “concerning” and stressing the public has a strong right to know.

“We understand the bureau’s approach to consider industry concerns of reputational harm that weigh in favor of keeping some data private, but we wish to stress that there is a strong public interest in publishing as much data as practicable,” the senators wrote in the letter.

The rule has faced pushback from lending groups. The Independent Community Bankers of America has asked the agency to exempt more community banks and small businesses from the new proposal. The CFPB should exclude banks with assets of $1.3 billion or less and define small businesses as those with $1 million or less in annual revenue.

“Community bank small-business lending is complex. It should not be commoditized and subjected to simplified, rigid analysis that would have a chilling effect on small-business lending,” ICBA President and CEO Rebeca Romero Rainey said in a press release Jan. 6. “While ICBA supports the proposal’s goal of expanding access to credit for minority-owned, women-owned and small businesses, we are concerned that its overly broad coverage will disadvantage community bank business customers.

The raft of Covid-19 relief programs run by the Small Business Administration also struggled to gather data from small business owners, leading to questions about which businesses got priority in 2020. The SBA said at the time it was legally unable to require applicants submit demographic data for the Paycheck Protection Program, instead opting for a voluntary disclosure. But a Business Journals analysis of more than 11 million PPP loans found the SBA reached a far more diverse set of business owners in 2021 than it had in 2020.

But while small and midsized businesses are facing a dizzying array of challenges, including the Omicron variant, supply chain issues, severe hiring difficulties and rapidly changing consumer habits — their optimism is on the rise.

About 71% of small businesses are optimistic about 2022, up from 63% one year ago. For midsized businesses, 83% are optimistic about 2022, compared to 77% a year ago,  according to JPMorgan Chase & Co.’s (NYSE: JPM) 2022 Business Leaders Outlook Survey. About 63% of small businesses anticipate revenue and sales growth in 2022, while 81% of midsized businesses expect revenue growth.

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