Thursday, July 28, 2011

CFPB Official Tells Congress Bureau Will Help Small Businesses Not Burden Them

A senior CFPB official told a House panel that, although the CFPB’s jurisdiction over small business lending is very limited, the Bureau can able to help small business borrowers in three ways. First, CFPB efforts to prevent unlawful discrimination should promote a fairer marketplace and thereby promote credit availability. Second, the Bureau will provide the market with better data on small business lending. Third, the Bureau may be able to help consumers who rely on their personal credit histories when they apply for a business loan.

In testimony before a House Small Business subcommittee, Dan Sokolov, Deputy Associate Director, Division of Research, Markets & Regulations, noted that the Bureau does not have jurisdiction over small business credit except in limited cases where Congress has explicitly and affirmatively granted the Bureau such jurisdiction. The main exception is the Bureau’s authority to prevent discrimination in business lending. The CFPB official also noted that the Bureau may be able to help many potential small business borrowers with better lending data and more accurate consumer credit histories.

He also pointed out that, under the Regulatory Flexibility Act (RFA), the CFPB must conduct a regulatory flexibility analysis unless it can certify that a proposed regulation will not have a significant economic impact on a substantial number of small entities. In these analyses, explained the senior official, the Bureau will consider the effectiveness and compliance burdens of a proposal versus less burdensome alternatives. Section 1100G of the Dodd-Frank Act amends the RFA to provide that the analysis must describe any projected increase in the cost of credit for small businesses, and significant alternatives in that light, and the CFPB will act accordingly.

The Bureau official also said that the CFPB will seek public input on benefits and costs even before it proposes a rule. The Bureau’s project to reform mortgage disclosures has engaged and will continue to engage extensively with lenders about how to reduce compliance burdens, well before proposing a regulation. The CFPB will also follow the requirements of the Small Business Regulatory Enforcement Fairness Act (SBREFA). Generally, unless the Bureau can certify that a proposed rule will not have a significant economic impact on a substantial number of small entities, the Bureau will seek input directly from small entities about potential costs and potentially less-burdensome alternatives even before proposing the rule.

Exceptions to the consumer laws’ focus on consumer financial services are few, explicit, and well-defined, he said, and they also provide significant benefits to small businesses. The Equal Credit Opportunity Act (ECOA) prohibits lenders from discriminating in the provision of business and consumer credit on the basis of race, national origin, sex, or other protected bases. The Bureau implements ECOA by regulation and supervises compliance with ECOA for certain lenders.

The Dodd-Frank Act helps small businesses by filling a major gap in knowledge about the market for small business credit. Section 1071 of the Act amends the Equal Credit Opportunity Act to require that financial institutions collect and report information concerning credit applications made by small businesses and women- or minority-owned businesses. One stated purpose of Section 1071 is to strengthen fair lending oversight. The CFPB and other authorities will be able to use these data to improve the effectiveness and efficiency of fair lending enforcement efforts.

New business lending data will also improve understanding of both demand conditions and supply conditions. Reporting this data publicly, as the Act requires, may tend to make the small business credit market more transparent and efficient. The CFPB official said that the Bureau will move deliberately and with substantial public input to maximize the benefit of these loan data for small businesses and to minimize the cost for their lenders. To develop implementing regulations, the Bureau will engage the small business community, business lenders, and civil rights and community development groups.

Small financial institutions, which frequently make both consumer loans and business loans, are often burdened disproportionately by compliance requirements, as compared to larger institutions. The Bureau is working to reduce existing regulatory burdens where feasible and to avoid imposing unwarranted new regulations, emphasized the Deputy Assistant Director.

The official also assured that the Bureau will consider the potential benefits and costs of proposed rules to consumers and covered persons, including small lenders. The Bureau will consider specifically impacts on banks and credit unions with assets of $10 billion or less described in Section 1026 of the Act.