Common misconceptions and challenges
When the CFPB 1071 rule was being reviewed, some community financial institutions expressed fear that the additional regulatory burden would reduce small business lending. An Abrigo survey found that 97% of bankers expect compliance to be difficult. However, while compliance costs may rise, the rule's goal is to ensure fair access to credit, which could, in the long run, enhance trust and expand lending opportunities. According to the National Community Reinvestment Coalition, improvements to Home Mortgage Disclosure Act data in 1990 and 1993 were linked to a 70% increase in conventional home purchase lending to African Americans and a 48% increase in lending to Latinx borrowers between 1993 and 1995. These findings underscore how increasing lending to underserved small businesses benefits those businesses and boosts the entire economy by fostering expansion and job creation.
Another misconception about the Equal Credit Opportunity Act is that it doesn’t apply to small lenders—but this depends on your definition of “small.” The CFPB 1071 final rule states that any financial institution that originated at least 100 small business loan originations or credit transactions in each of the two preceding calendar years must comply.
Some financial institutions that meet these criteria do not currently collect data on borrowers until late in the loan process. To stay compliant, they will need to formalize their loan application processes and CFPB small business data organization methods. Furthermore, as part of the data collection, financial institutions must limit access or create a “firewall” so that employees in a position to make credit decisions about those applications don’t have access to the race, ethnicity, and sex data. Financial institutions must submit this data to the bureau annually for the bureau to make public. Banks and credit unions will need to create procedures and utilize appropriate software so that borrower information stays private.
