The Consumer Financial Protection Bureau (CFPB) recently finalized a rule that will require financial institutions to ask small business owners invasive questions and then publicly report the data they collect to the federal agency. The time is now for small business owners and bankers to speak up and tell our policymakers in Washington to block this misguided rule.
Small business owners should contact their U.S. senators and representatives now to protect their privacy by passing H.J. Res. 50, which would provide congressional disapproval of the CFPB’s Section 1071 rule.
At a time of growing threats to privacy and security in an increasingly plugged-in world, this new federal regulation threatens to make the problem worse for the residents and small businesses in communities nationwide. It would have a harmful impact on privacy and potential to restrict access to credit to the small businesses that drive the nation’s economy, particularly the women- and minority-owned businesses this rule is designed to help.
Big Rule for Small Businesses
The CFPB’s new 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. The data points this new rule requires institutions to collect and report far exceed those required by law, compounding its impact on small businesses and financial institutions.
Harming Local Economies
The CFPB’s rigid data collection requirements will hamper the ability of Alliance Bank and other financial institutions 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.
These requirements and their chilling effect on small-business lending will ultimately harm the borrowers the bureau is trying to help.
With the U.S. Supreme Court considering a case challenging the constitutionality of the CFPB’s funding structure, the bureau should first issue a stay on the rule’s effective date until the high court issues a decision, which will likely come next year. Meanwhile, the CFPB should use its authority to exempt more community banks and small businesses from its rule and limit mandatory data points to those required by law. To avoid disadvantaging small businesses in local communities, including right here in rural Indiana, Washington should suspend and ultimately block this misguided policy.
Shane Pilarski is president and CEO of Alliance Bank, a locally-owned community bank that has been serving small business owners in Indiana since 1930.