US Small-Business Lenders on Notice: Consumer Financial Protection Bureau Wants More Data on Applicants, Outcomes

Digital Lending

The US federal government’s Consumer Financial Protection Bureau recently proposed new rules under an amended Equal Credit Opportunity Act.

The CFPB wants small-business lenders — mainly banks and credit unions —  to collect each loan applicant’s demographic and financial data to help the bureau enforce fair-lending laws. The result, says the consumer watchdog, would be “the first comprehensive database of small business credit applications in the United States.”

The CFPB is unlikely to be talked out of it

So how likely is this proposal to become a rule that lenders have to account for in their compliance regimes? According to Pymnts.com, the answer is “quite likely.” In an interview with the payments-industry trade publication, one expert, previously an associate director in the CFPB’s enforcement unit, expects the bureau to take a hard-line approach, even to the extent of  “aggressively pushing the limits of what their authority may be.

Other signs of the CFPB’s willingness to go to the mat to ensure equal lending opportunities for small businesses, Pymnts.com cites  “a windup of action, of lawsuits and allegations of consumer harm” tied to small-business lending.

Under the proposal, lenders would have to provide:

  • Information about the credit small businesses seek and obtain This is meant to help the CFPB understand small-business lending trends. Creditors would be required to share data on the purpose, type, and amount of credit being applied for, the amount approved or originated, geographic location, gross annual revenue, industry, number of workers, time in business, number of owners, and key elements of the cost of the credit, primarily via interest and fees.
  • Demographic information about small business owners This is supposed to help the government, lenders, and members of the public identify areas of business and community development needs, new lending-program opportunities, and potential fair-lending concerns. Lenders would be required to report the ethnicity, race, and gender of the applicant’s principal owners, although applicants are permitted to decline to answer. Lenders would be required to inform applicants that the lender may not discriminate on the basis of this demographic information.
  • How applications are received and their outcomes The CFPB wants lenders to provide information such as loan-application date, method of application (in-person, online, etc.), first recipient of application (lender, affiliate, or third party), action taken, and reasons for denial where applicable. This is meant to give the regulator insights into how — and how fairly — small-business loans are handled at the application stage.

In addition to establishing the first US archive of information related to small-business lending, the CFPB plans to publish application-level data — with provisions included to balance applicants’ expectations of privacy with the societal benefits of publication, according to the CFPB.

US lenders should prepare, now, for these new reporting requirements

It’s never easy to predict the fate of a federal agency’s proposal for a new rule,” says Dmitry Voronenko, CEO and co-founder of Turnkey Lender, a pioneering lending-technology maker with clients in more than 50 jurisdictions worldwide. “The political winds can change, even when it comes to so-called sure things, and new priorities can take precedent.”

But, adds Voronenko: “This time, with the mid-term elections more than a year away, the CFPB seems intent on making this change happen while effective opposition is weak.” In other words, says the lending expert, “the prudent thing from an operations perspective is to act as though it’s a done deal, and start figuring out how to do the reporting that’s going to be required.”

For lenders with proprietary lending technology, the most straightforward fix requires adding custom fields in the applicant profile for each application, a process that may require testing (and subsequent tweaks) that could disrupt normal business activity. Meanwhile, lenders that completely outsource their lending operations may be spared disruptions prior to rollout — only, it must be said, to encounter compliance shortfalls after the CFPB raises a query.

A neater solution — especially when it comes to staying on top of compliance changes — is available to lenders that keep lending operations in-house by means of white-label software. In this version, compliance updates can be added, tested, and then rolled out safely by the software maker. And this can be done in ways that don’t disrupt day-to-day operations for the lender.

The efficiency we bring to compliance changes and updates is something we’re quite proud of,” says Voronenko, who credits Turnkey Lender’s global reach and consequent experience with dozens of compliance regimes.

Sidebar: CFPB’s quest to track small-business loan applications: background and details

In laying out its new proposal, the Consumer Financial Protection Bureau underlines the importance of small businesses to the US economy. The bureau, citing data from the Small Business Administration, says small businesses employ one in every three US adults, and in the last decade has created almost twice as many net new jobs as large businesses. Altogether, small-business lending put $2.4 trillion into the economy. In this light, “failing to make small business lending accessible to all who qualify stifles innovation and competitiveness, and it hampers American entrepreneurship in our cities and suburbs, on our farms, and in all our communities.”

If the proposal becomes a rule, as seems likely, extensive new reporting requirements would add millions of dollars in compliance costs for “a wide range of lenders, including the smallest community banks,” says the American Action Forum, a conservative think tank in Washington, D.C.

The CFPB has opened the door to comments on its proposal “from small business entrepreneurs” through the end of November 2021. Notably, while the CFPB has gone also provided a permanent “Tell Your Story” portal through which small businesses can ”share their stories about applying for credit” and “help inform the CFPB’s work,” it’s not seeking comment from lenders.

As mentioned, the CFPB seems to feel its proposal — which was supposed to have taken effect under the Dodd-Frank Act more than a decade ago (before getting derailed by partisan wrangling) — is a done deal this time. In keeping with this stance, the bureau doesn’t expect it will have to extent its 90-day comment period, a frequent occurrence in hammering out compromise around controversial financial-service rule-making linked to existing legislation.

Want to comment on the CFPB’s proposal for gathering data on small-business lending?

Find the rules for commenting here, and instructions for submitting comments on bureau’s proposal to collect small-business data here.

Compliance you can rely on, automation in all facets of lending

“Frankly, we deal have to deal with so many compliance issues that actual updates and revisions to our compliance forms is everyday work for us,” adds Voronenko. “As a result, something like the CFPB changes now in view is easy for us to, almost routine.”

Watch the success story National Iron Bank undergone with TurnKey Lender

Turnkey Lender’s response to the challenges posed by regulatory changes shows how fintech innovations grow in step with the needs of lenders, especially those with digital operations. These days, you don’t need to create your own custom platform to take care of origination, underwriting, servicing, and collection, let alone compliance. Fintechs like Turnkey Lender create solutions that automate the entire lending process for any business that offers credit, in any and all forms.

Beyond compliance, a digital-lending platform provider like Turnkey Lender can help lenders trim operational costs and eliminate human error by automating every step in the lending life-cycle. And Turnkey Lender’s built-in scalability means a lender can manage any number of consumer and small-business credit products on one integrated platform — whether it’s in service of a bank, credit union, or community-development financial institution.

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