President Biden should sign resolution blocking data collection rule to preserve small-business lending

For anyone looking for reasons behind Congress’s decision to pass a bipartisan resolution to overturn a federal rule that would ratchet up reporting burdens on small businesses and their lenders, now is a good time to understand the “why.”?

Because the Consumer Financial Protection Bureau regulation would require financial institutions to burden small-business customers with invasive questions and then publicly report the data they collect to the federal agency, it makes sense that President Joe Biden should sign the resolution into law to preserve the flow of credit to American small businesses.?

Big Rule for Small Businesses?

The CFPB’s rule implements a section of federal law requiring lenders to collect and report data on credit applicants. The law specifies several data points financial institutions must compile on applications from women-owned and minority-owned businesses, including the race, sex, and ethnicity of the principal owners as well as gross annual revenue.?

While these requirements are mandated by Section 1071 of the Dodd-Frank Act of 2010, the CFPB has the authority to exempt any class of financial institutions from the standards it develops and to limit mandatory data points to those required by the law.?

For applicants served by community banks — which make roughly 60 percent of the nation’s small-business loans and are leaders in meeting the credit needs of women- and minority-owned businesses — the CFPB has opted to apply the rule to the vast majority of local financial institutions and the businesses they serve. And the data points it requires these institutions to collect and report far exceed those required by law, which would have an unfortunate and unnecessary impact on small businesses and community banks.?

Why It’s Bad for Local Economies?

The CFPB’s rule will have a substantial negative impact on small-business lending for several reasons, which is why lawmakers have voted to nullify it in the first place.?

First, the rule raises significant concerns about the privacy of applicants for commercial credit, particularly in smaller communities and rural areas. Community bankers are concerned for small-business customers that are the only business of their type in their local community, such as the town dentist or auto repair shop. Requiring financial institutions to collect and report data on loan applicants will make it possible for them to be identified, potentially driving small businesses away from community banks and local communities.?

Second, 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, which is a hallmark of relationship-based lending. While community banks look at each small business individually and make highly customized loans based on numerous borrower characteristics and market variables, the Section 1071 rule requires a homogenized approach that will degrade their ability to offer small businesses the type of credit they need in a timely and efficient manner. Small-business lending is not and should not be a commodity.?

Third, these requirements and their chilling effect on small-business lending will ultimately harm the borrowers the bureau is trying to help — women-owned and minority-owned businesses. These mandates would compound the regulatory and paperwork burdens that disproportionately affect community banks, limiting their ability to make small-business loans. By targeting the community banks that are outpacing larger institutions in serving minority and women borrowers, the CFPB’s self-defeating rule threatens to undermine a part of the banking sector that is working as it should.?

Bipartisan Response from Congress?

For these reasons, the House and Senate have voted on a bipartisan basis for a resolution that provides for congressional disapproval of the rule and dictate that it has no force or effect. Lawmakers from both parties have united to roll back the rule given its harmful impact on privacy and its potential to restrict access to credit to the small businesses that drive the nation’s economy.?

Community bank small-business lending is a complex process that cannot be commoditized like consumer or mortgage lending, which would have a chilling effect on access to credit, particularly for the borrowers Washington is seeking to help. With the bipartisan congressional resolution now headed to the White House, President Biden should sign this critical measure into law to ensure community banks can continue meeting the needs of the nation’s small businesses.?