The Consumer Financial Protection Bureau announced Wednesday it is collecting data pertaining to credit access among small businesses, particularly those owned by women and minorities.
Now, CFPB Director Richard Cordray announced at the Small Business Lending Field Hearing in Los Angeles that this is just the first step towards creating new regulation.
Why does small business credit need more regulating? Because, it's not close enough to the underwriting standards in place for mortgage lending, by way of comparison, Cordray explained.
“The inquiry we are launching today is a first step toward crafting this mandated rule to collect and report on small business lending data,” Cordray said in his prepared remarks. “To prepare for the project, we have been building an outstanding team of experts in small business lending.”
“We are enhancing our knowledge and understanding based on our Equal Credit Opportunity Act compliance work with small business lenders, which is helping us learn more about the credit application process; existing data collection processes; and the nature, extent, and management of fair lending risk,” he said.
Cordray recognized there will be challenges to creating the new rules, saying small business lending is much different than the mortgage market. He emphasized small business lending is unevenly more diverse in its range of products and providers, when compared to home loans.
“Unlike the mortgage market, many small business lenders have no standard underwriting criteria or widely accepted scoring models,” Cordray said. “For these reasons and more, we will proceed carefully as we work toward meeting our statutory responsibilities. And we will seek to do so in ways that minimize the burdens on industry.”
The director outlined three key issues the CFPB’s request for information focuses on.
1. Define small businesses
Cordray pointed out there is little consensus on what constitutes as a small business. At times, the Small Business Administration will look at the number of employees, while at others it will look at the annual receipts.
2. Extent of access
The CFPB is looking to see where small business seek financing and the types of loan products that are available to them. Initial research seems to show term loans, lines of credit and credit cards are the main financing source for small businesses.
3. Categories of Data
The regulator is seeking information on what types of categories are currently being used when collecting and reporting data on small businesses, to determine how institutions compare with the new requirements that will be put in place.
“We are sensitive to the fact that various financial institutions may not currently be collecting and reporting all of this information in the context of other regulatory requirements,” Cordray said. “And we understand that the changes imposed by this rule will create implementation and operational challenges.”
Cordray once again called upon lenders to submit the information to the CFPB, including any technical challenges posed by collecting and reporting the data.
“We will put all of this information to work in thinking carefully about how to fashion the regulation mandated by Congress under Section 1071 of the Dodd-Frank Act,” he said.