CSBS Issue Briefings - January 2020

CSBS ISSUE BRIEFING

Dodd-Frank Act Section 1071

CSBS Official Public Position State regulators strongly believe that the proposed small business lending data collection requirements would have a disproportionately negative impact on community banks and would disrupt small business lending in local communities. Summary Section 1071 of the Dodd-Frank Act is intended to expand Regulation B of the Equal Credit Opportunity Act and grant the Consumer Financial Protection Bureau (CFPB) the authority to collect data from small business lenders. Essentially, the CFPB would require financial institutions to compile, maintain and report information concerning credit applications made by women-owned, minority-owned and small businesses. Why It Matters to State Regulators A lack of transparency regarding how the small business loan data will be used in the examination or compliance assessment process could cause banks to reduce their small business lending. At a minimum, these new data collection requirements will impose additional and disproportionate compliance costs on smaller financial institutions with limited resources and unnecessarily raise the cost of originating small business loans by all lenders. Studies have established that long-term lending relationships between banks and businesses are valuable to small firms in terms of increased credit availability and protection against adverse credit shocks. • Community banks hold a relatively small percentage of total industry assets but are responsible for more than 45% of small loans to businesses. • The relationship lending model utilized by community banks does not lend itself to an inflexible set of data points contemplated by DFA1071. • Small business lending is highly individualized; underwriting and loan pricing depend on many heterogeneous variables that are inherently unsuitable for mass-data fair lending analysis. • Banks already demonstrate their commitment to small business lending through the Community Reinvestment Act, and expanded reporting is unnecessary. • In its spring 2019 rulemaking agenda, the CFPB restored Section 1071 rulemaking to current rulemaking status (where it had previously before been classified as a long-term item), with January 2020 indicated as the date for pre-rule activity. • CFPB held a symposium focused on small business lending data collection in November 2019. • CFPB has indicated its next step will be convening a panel under the Small Business Regulatory Enforcement Fairness Act to consult with representatives of small businesses that may be affected by the rulemaking. Talking Points •

SME Contact: Daniel Schwartz, Director of Policy Development, (202) 728-5742, Dschwartz@csbs.org

Date Updated: 01/09/2020

FOR STATE REGULATOR USE ONLY