This issue first hit my radar screen last year when a mid-sized bank contacted me about Fair Lending and Small Business lending. In a recent exam, the bank was under scrutiny regarding their small business lending in relationship to women and minority-owned companies. This was the first time the bank encountered this issue, and to that point, I had not heard of this either. I quickly contacted my experts in Washington, DC to find out what they were hearing. While they had no litigation at that time, they were hearing rumors of exams where this was becoming an issue and had never heard this before.
Well, it looks like those first rumblings are turning into real risk concerns for lenders who offer small business loans, due to unfinished business in Dodd-Frank. On May 10, 2017, the CFPB issued “Key dimensions of the small business lending landscape.” In this 41-page document, the CFPB describes their reasoning behind the need for data collection on small business lending and asks for public comment. We have all been through enough regulatory changes by now to understand that first comes public comment and then comes regulation!
Unlike mortgage lending, banks have not collected consistent information on small business lending. However, under Dodd-Frank, the following is mandated and is excerpted from the comment paper:
“Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amended the Equal Credit Opportunity Act (ECOA) to require financial institutions to compile, maintain, and submit to the Bureau certain data on credit applications by Women-owned, minority-owned, and small businesses. These data include the census tract of the business and the race, sex, and ethnicity of the principal business owners, in addition to a number of other data points. Congress enacted Section 1071 for the purpose of facilitating enforcement of fair lending laws and enabling communities, governmental entities, and creditors to identify business and community development needs and opportunities for Women-owned, minority-owned, and small businesses. The Bureau has interpreted Section 1071 to mean that obligations for financial institutions to collect and submit data “do not arise until the Bureau issues implementing regulations and those regulations take effect.”
Thankfully, that last line about not being obligated to report until the rules are implemented is in writing!
To complicate matters further, there are different types of lending based on varying types of collateral, which causes fair lending evaluation to become quite complex. For instance, are most of your loans to women or minority-owned companies credit card based vs. non-minority loans that are company collateral based? Variations on how lending is offered are going to open up a whole new world of monitoring so here are some tips on how to get started:
- If you do small business lending read through the attached document thoroughly!
- Those with an opinion should comment. All comments are read, and if this type of scrutiny will prove burdensome or chaotic to your business, you should let the CFPB know why. The trade groups are issuing comments, but it is also important for your company to do the same.
- Compare the data that you presently collect and compare it to what is likely to be asked of your institution. There is no doubt that the CFPB must issue regulation on this because it is mandated in Dodd-Frank.
- Evaluate what needs to be changed in your systems and intake process to collect the possible additions of data requirements.
- Take a look at your present lending patterns and determine how you may monitor this line of business in the future. Are you concerned that you do not do enough small business lending to women or minority-owned companies as compared to others that you lend to? Are your requirements for lending in line with others in the community that are doing more lending in this area? Are there disproportionately higher rates, shorter terms, more collateral requirements to women or minority-owned clients versus non-minority? If so, do you have proper business justifications backed by empirical data?
There is certainly a lot to consider as this issue continues to heat up. The smart lenders will begin to tackle this issue and have discussions based on past practices and what they may need to consider for future practices.
Stay tuned for more tips on this issue as this regulation begins to develop. If you are not subscribed to our blog, make sure that you subscribe to stay informed.
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