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Small business lending is a complex business that cannot be “commoditized” in the same way as consumer lending. Each small business loan is unique and has customized terms based on an analysis of numerous factors. Imposing rigid data collection requirements may limit the ability of community banks to tailor loans to meet the unique needs of their small business customers, which is the cornerstone of relationship lending.
The CFPB has issued a proposal to implement rules for the collection and reporting of data on financial institutions’ small business lending under the Equal Credit Opportunity Act. This includes the collection of data that will be used to facilitate enforcement of fair lending laws.
While the governing statute requires the collection and reporting of 13 pieces of data, the CFPB is using its discretionary authority granted by statute to propose collecting an additional 8 data points. These discretionary data points have little to do with a borrower’s credit risk but will increase the costs of originating loans and pose a privacy risk to small business applicants. Further, the breadth of the data required to be collected and potentially published under the CFPB’s initiatives may make it possible to identify an individual borrower.
The Bureau has the authority to exempt community banks from compliance with this rule and has proposed to exempt lenders that originate fewer than 25 qualifying small business loans per year. This threshold is far too low; the data collection requirements would apply to a majority of community banks, resulting in increased compliance costs for community banks and a higher cost of credit for small business borrowers.