Chris Friedman and Brian Epling, regulatory compliance lawyers who work with banks, fintechs, and other small business lenders from the Nashville firm of Bradley Arant Boult Cummings LLP, say the proposed rule will require both mechanical and cultural changes for many financial institutions.
Some data overlaps with HMDA
Some of the required data points, such as some applicant and demographic data points, are the same as those mandated under the Home Mortgage Disclosure Act (HMDA). Many lenders have something in place to handle that reporting, Epling said.
However, many data points are different. And perhaps more importantly, the proposed rule may require big changes in policies and procedures for some lenders.
“On your business lending side, folks aren’t really all that used to consumer-style regulations that folks on the mortgage side or the unsecured side of the house have to deal with,” Friedman said. Some bankers on the business side of financial institutions, especially the small business side, are surprised that the Equal Credit Opportunity Act applies to the commercial side of lending and are unaware of best practices that can lessen risk in that space, he said.
Possible operating changes
In addition, some lenders will need operating changes, such as with their application process. Lenders that are used to working out tentative loan deals with business owners “on the backs of napkins” or via other more informal avenues will have to collect a lot more data, Epling said.
“This will be a shock on the lending side,” he said. “Sometimes they sort of operate in the Wild West, where they make a deal and sketch it out and then formalize it in a loan agreement. I don’t think that’s going to be the case anymore.”
“I can see where for the true relationship lenders, this is going to be a challenge,” Lucci said. However, the CFPB seems set on getting this data, and institutions should already be using digital systems to collect small business loan applications anyway, she said. “The days of a handshake and ‘I’ll give you a loan’ are long over. That really was in the smaller, more rural areas where the bank was owned by a family.….You know everybody, and you did this on a handshake. But that doesn’t really work anymore.”
She noted that taxpayers footing the bill for government insurance of financial institutions’ funding sources are driving the changes, because they want to know whether lenders are treating borrowers fairly.
“This information needs to be codified in a computer system,” Lucci said.
Rule comments due Nov. 30
Depending on the volume of comments the CFPB receives, the compliance date could be delayed, Lucci said, which might give financial institutions longer to prepare for the changes.
In the meantime, to submit comments on the proposed rule:
- Visit the Federal eRulemaking Portal: https://www.regulations.gov. Follow the instructions for submitting comments.
- Email: 2021-NPRMfirstname.lastname@example.org. Include Docket No. CFPB-2021-0015 or RIN 3170-AA09 in the subject line of the message.
- Mail/Hand Delivery/Courier: Comment Intake—Section 1071 Small Business Lending Data Collection, Bureau of Consumer Financial Protection, 1700 G Street NW, Washington, DC 20552.