Meet the Long-Awaited Financial Regulation That’s Making Your Banker Nervous

Some lenders must disclose certain small business loan data in the future thanks to new regulations aiming to prevent discrimination in lending and expand access to capital. 

The Consumer Financial Protection Bureau on Thursday finalized its much-anticipated rule on small-business lending data collection standards. The rule, known as Section 1071, is part of the Dodd-Frank Act, the swath of banking regulations passed in the aftermath of the financial crisis that promote the financial system’s stability. 

Section 1071 will require financial institutions to gather and submit specific data points about small-business lending applications, including race, ethnicity, gender, and other information. And though it will require extra red tape for banks, which could drag out the loan approvals process, some banking industry observers say, others call it a win for small businesses.

The finalized rule could allow small businesses owned by women and people of color “to finally have a fair shake at being able to gain access to transparent capital,” says Joshua Miller, the vice president of research and policy at Accion Opportunity Fund, a community development financial institution based in San Jose, California. He points to well-documented racial discrimination and systemic inequity as some of the obstacles these groups face in accessing capital.

Black women, for example, make up the fastest-growing group of U.S. small-business owners. And yet a recent survey from members of the Black Owners & Women’s Collective show that 95 percent of entrepreneurs resorted to using their own finances to start their business. A mere 13 percent had access to capital, according to the survey. 

The hope is that this data will expose lending gaps, which can more readily be addressed by lawmakers (or financial institutions themselves), and ultimately, help expand access to capital. 

“This is not a restriction,” says John Arensmeyer, CEO and founder of the Washington, D.C.-based small business group Small Business Majority. “This is simply asking for data, which is really necessary so policymakers can start to figure out how to narrow the [access to capital] gap and fix the problems.”

Not everyone’s celebrating the CFPB’s decision, which could boost banking costs. A CFPB analysis estimated that additional costs to comply with Section 1071 clocked in between $34 to $99 per application. Banking trade groups such as the D.C.-based Independent Community Bankers of America have pushed back against the rule, claiming that it “will have a chilling effect on customized lending.” The ICBA believes the rule would diminish access to credit, at least for some, since they argue a more onerous data-collection process could discourage lenders from taking on loans that can’t be easily reported. 

“We have significant concerns that it could hinder the ability for community banks to tailor loans to their small-business customers’ unique needs,” says Michael Emancipator, the vice president and regulatory counsel for ICBA. It could spur a race to the middle–that is, lenders might be disinclined to provide loans to borrowers that deviate from the norm, which can be true of loans issued to low-income or otherwise underrepresented borrowers. If a loan requires additional reporting steps, lenders may decide to just avoid making them altogether, suggests Emancipator.

It’s a concern shared by Patrick Reily, the CEO of Verde International, an Atlanta-based analytics firm serving financial institutions. “If we increase the cost for banks to do small-business lending, some loans will no longer be viable and overall lending will likely decrease,” says Reily, who is also the co-founder of Uplinq, a credit scoring and assessment platform catering to small business lenders.

The CFPB notes that not everyone is subject to the regulation. Lenders that dole out at least 100 small business loans annually must adhere to Section 1071, per the final rule. 

The rule will go into effect 90 days after being published in the federal register, though lenders will have additional time to comply. The CFPB’s final rule spells out so-called compliance date tiers to guide financial institutions on when they must comply. The CFPB will publish the data annually. 

“This small-business loan census will give the public key data on this market to ensure that banks and non-banks are serving small businesses fairly,” CFPB director Rohit Chopra said in a statement.