Banks say they’ll have to spend more on staff time and other costs to collect data under a planned CFPB small-business lending rule aimed at uncovering racial disparities in access to credit. iStock illustration

A proposed bank regulation intended to improve transparency and highlight any existing discrimination in small business lending is being met with resistance by local and national banks, who say its added costs come at a time when bank finances are under pressure. 

The CFPB finalized a rule under the Section 1071 of the Dodd-Frank Act on March 20 that will expand collection of data from small business borrowers – from 13 data points to 80 – and require lenders to make the data available to the public. 

Broadly similar to Home Mortgage Disclosure Act data reporting requirements, the new rule aims to identify and service the lending needs of women-owned, minority-owned and small businesses and for the banking industry to adopt a “data-driven approach to detect potential discrimination” in the loan underwriting process, the bureau said. 

But the banking industry is concerned about the new rule and has made steps to delay its implementation. 

“This rule has the same intent as HMDA from the small business lending side. But the industry’s view is [the CFPB] has gone way, way beyond what the Congress intended and many business groups have weighed in on their own concern,” said Kathleen Murphy, the president and CEO of the Massachusetts Bankers Association. “If you’re a small business in a community or a city that has tens of thousands of businesses, all of your information now has to be collected, and there are real concerns about the privacy of these businesses and the business owners themselves.” 

The Texas Bankers Association, Texas-based Rio Bank, and the American Bankers Association won an injunction in federal court July 31 to delay the 1071 rule’s implementation in Texas. Kentucky’s bankers’ association has also filed a separate suit against the rule. The rule’s implementation is also wrapped up in a Supreme Court case challenging the very constitutionality of the CFPB. 

But while these legal challenges play out, with a decision in the Supreme Court case not expected for a year at the earliest according to the ABA, local banks are still marching forward with work to comply with the rule, Murphy said – work that’s eating into bottom lines as a broad lending pullback and heightened interest rates shrink profit margins.  

Debate Over Compliance Costs 

According to a public comment by the ABA filed last year in response to the CFPB’s initial Section 1071 proposal, the regulator estimated banks that made 100 small-business loans would face $7,386 in ongoing implementation costs per year, while banks that made 400 loans per year would wind up spending $35,476 annually. But the ABA argued these estimates understate the rule’s actual annual costs, which it put at:  

• $40,152 for banks with assets below $500 million,  
• $67,089 for $500 million- to $999.9 million-asset banks, 
• $121,807 for $1 billion- to $9.9 billion-asset banks and 
• $301,815 for $10 billion- to $74.9 billion-asset banks. 

Currently, the rule calls for data reporting starting from the largest lenders as early as October 2024.  

These increased costs imposed by the Section 1071 rule could “harm the very entrepreneurs we all seek to help” by making banks reduce their lending, ABA CEO Rob Nichols said in a statement reacting to the July 31 ruling. 

Massachusetts’ banks have been facing increasing deposit costs as interest rates have risen and as many have decided to tighten lending standards in the face of a possible recession.  

While some publicly traded Massachusetts-based lenders, like Eastern Bank, reported their net interest margin increased in the second quarter, most reported significant declines over the first quarter. Rockland Trust saw its NIM fall 25 basis points to 3.54 percent, HarborOne saw its NIM slide 28 points to 2.31 percent, Berkshire Bank cited a 34-basis-point slip to 3.24 percent and Cambridge Trust reported a 40-basis-point drop to 2.21 percent. 

In addition, the largest regional banks, with $100 billion in assets or more, will likely have to spend money building up their reserves under a new capital requirement proposal stemming from the spring bank failures. 

Data Missing on Disparities’ Cause 

The CFPB’s planned Section 1071 rule came after the pandemic exposed serious racial disparities in who has access to bank credit. 

The bureau claims its planned rule could’ve improved lending in the Paycheck Protection Program, and could have led to “better targeted, more effective lending” during the pandemic. 

Nika Cataldo

“Many local businesses were shuttered during the COVID-19 pandemic after they struggled to obtain credit under the Paycheck Protection Program,” CFPB Director Rohit Chopra said in a statement. “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.” 

Glynn Lloyd, executive director at Mill Cities Community Investments (MCCI), said the Section 1071 rule could be a “game-changer” in clarifying how racial disparities in lending are influenced by bank practices. 

“Basic underwriting takes place in our banks where they look at personal finance payments and other transactional data from folks with big capital. Minority groups and immigrants are at a disadvantage right out of the gate as there is a wealth gap and lack of financial data. They tend to have smaller savings or transactions which can lead to feedback that has bias wrapped into it. And that is just the beginning,” Lloyd said. 

MCCI is the first Black-led CDFI in Massachusetts, and it provides $5 million to $10 million in loans yearly to women-owned, minority-owned and other small businesses in its key markets of Boston and the Merrimack Valley cities of Lawrence, Lowell and Haverhill.