New Disclosure Rules: Impact on Small Lenders

Two organizations which are officially representing lenders have made their comments about a new rule announced by the Consumer Financial Protection Bureau (CFPB) on September 1. In the final analysis,  the rule would force lenders to disclose information concerning their lending to small businesses.

Rebeca Romero Rainey, the President and CEO of Independent Community Bankers of America (ICBA), published her opinion that the rule would be applied to too many community banks. She noted that the bureau’s proposal will influence community banks that originate 25 loans or more. Even the smallest community banks in underserved and rural areas, where barriers to credit need to be reduced, would be caught in that trap. 

Rebeca Romero Rainey also suggests that imposing any new reporting and data collection requirements on community banks will substantially harm lending for small business at the very time when local business owners are working hard to recover and survive from the COVID-19 outbreak.

The Credit Union National Association (CUNA) responded to the CFPB with a post on the CUNA website that the new rule is corresponding and mandated by Section 1071 of the Dodd-Frank Act.

CUNA admits that Section 1071 is aimed at ensuring fair and equitable financial opportunities. But, at the same time, Credit Union National Association is also concerned about potential unintended consequences and substantial compliance costs increase caused by the finalization of a complex, overly-broad data collection.

At the early stages of making the rule in December, CUNA wrote to the CFPB underlining long-term support of credit unions with fair lending laws and emphasizing that both financial institutions and consumers need to have a clear understanding of regulations and statutes.

Transparency is the goal

The CFPB states that the proposed new rule is announced to help small businesses acquire the access to the credit they are seeking by increasing transparency in the marketplace of lending.

It is said that the proposed rule is designed to provide better information about small business lending by making lenders collect and report the information about the credits small businesses seek and get, how applications are received and their outcomes, and demographic information about small business owners.

CFPB explains that in the text of the new rule figures from a PYMNTS and Fundbox collaborative report are used to estimate the trade credit market size. By using these figures, the CFPB estimated $51 billion total annual revenue in outstanding balances in 2019 for the trade credit market for businesses under $1 million. For businesses between $1 million and $5 million, it’s $88 billion.

Dave Uejio, CFPB Acting Director, said during a press call on the day the proposed rule was announced, that at final stage the new lending rule will help better understand small business – vital component of the American economy – and ensure easy and free from discrimination and other barriers access to credits for entrepreneurs.

One more issue we have to address is the transparent credit scoring solution to ensure that banks and MFIs approve more of the right loans. This will give a higher rate of approved loans for SMEs.

Small businesses need resources

Uejio says that during the Great Recession and the coronavirus pandemic, small businesses were hit hard and found it difficult to gain access to credit.

The proposed rule will ensure that creditworthy small businesses will get the credit they are seeking, when they really need it both in times of crisis and in times of prosperity.

PYMNT in its research has found that 56% of small and medium-sized businesses (SMBs) frequently experience cash shortfalls. And the percentage is even higher among younger and less profitable businesses reaching 65%.

Together with the proposed rule announcement, the CFPB also launched a new Tell Your Story portal for small businesses to share their stories about applying for credit which will help inform CFPB’s work.