Stringent data and reporting requirements could negatively impact small business lending in the US, according to the Independent Community Bankers Association (ICBA), while lawyers believe it could be an opportunity for fintechs to establish themselves in the market.
Under Section 1071 of Dodd-Frank, the Consumer Financial Protection Bureau (CFPB) is responsible for requiring financial institutions to compile, maintain, and report certain information about applications made by small businesses, particularly those that are owned by women and minorities. In October, the CFPB reclassified its timeline for implementing section 1071 from pre-rule status to longer-term action status.
“It’s possible especially the smaller the town, the smaller the community, you might be able to reverse engineer some of these loan applications and see who might have been denied,” says Michael Emancipator, vice president and regulatory counsel for the ICBA.
“It becomes a very sensitive thing for consumers and small business owners who don’t necessarily want that information out there,” he says.
On April 24, the ICBA wrote a letter to the CFPB’s newly-installed director Kathleen Kraninger, reiterating the association’s concerns that imposing new data collection and reporting requirements could “lead to unfortunate, unintended consequences for small business owners seeking credit”.
For Emancipator, the letter was necessary to echo conversations that Kraninger had with the ICBA as well as those she’s had with the community banking industry.
“We thought it would make sense to memorialize some of those conversations and make sure that it is top of mind for the new director. Certainly, a lot of community banks make their bread and butter in small business lending, and it is really important for them, but it also important for their communities, and the small business in those communities that are trying to stay alive,” says Emancipator.
However, for Abigail Lyle, partner at US law firm Hunton Andrews Kurth, if section 1071 is implemented and small business lending data becomes more uniform it could provide an opportunity for fintechs to get involved.
“Right now, there is no standardized reporting, so there hasn’t been any data collection of this field that potentially could become relevant so there is an opportunity for fintech companies to develop new programs that can allow for this information to be captured easily, more efficiently, more cost effectively,” says Lyle.
“Small business lending hasn’t been an area where fintech has been able to get into at great speed because it has been so customizable in the past, and it really came down to community banks being able to look at the community and meet the needs of these unique borrowers,” she says.
“There is a lot of small business lending that isn’t that different to a consumer loan, it’s getting less than a $100,000 loan to fund unique purchases, or just ongoing operating costs. That type of range for small institutions, or maybe it is the individual guarantor who is putting up their credit, that is not very different to a consumer loan where fintech has been great at already serving that need.”
According to a report by the US Federal Deposit Insurance Corporation (FDIC) published in October, community banks hold 42% of small business loans, despite holding 13% of banking industry assets.