Director Rohit Chopra’s Prepared Remarks at the NCRC Just Economy Conference
Good afternoon. Thank you to the National Community Reinvestment Coalition for inviting me and to all of you for joining. I’m very excited to share that the CFPB is issuing a new rule today to implement Section 1071 of the Consumer Financial Protection Act, a dormant provision of law that requires the creation of a new data set on small business lending in America.
Today, I will focus my remarks on small businesses and how they can drive growth and be a vehicle for wealth creation. I will also discuss what lessons were learned about small business lending through the Paycheck Protection Program during the pandemic. Then, I will touch on the Community Reinvestment Act and how the new CFPB rule on small business lending will help ensure that lenders are providing fair access to credit. I will close with some thoughts on the recent failures and liquidations of Silvergate Bank, Silicon Valley Bank, and Signature Bank.
Small Businesses and the Paycheck Protection Program
More and more sectors of the economy are dominated by a handful of giants. Over the years, we have seen relentless consolidation as supermarkets, tech companies, airlines, hospitals, telecommunication firms, pharmacies, and agricultural companies merged within their respective industries to become larger and more powerful. Fewer communities house the headquarters of small local businesses, and instead are dominated by outposts of large and distant corporations.
While people often point to homeownership as a critical goal for wealth building, small business growth is critical on so many levels. More money gets invested locally. More workers are hired locally. Students who graduate can find opportunities locally. And rural cities and towns, in particular, often center their local economy around small business growth.
As the COVID-19 pandemic rolled its way through the economy, many small businesses found themselves on the brink. Family farms and other sectors critical to rural economies were upended by the turmoil. Many of these small businesses didn’t get special access to credit facilities or have other ways to stay afloat. Then Congress passed the Paycheck Protection Program to allow, among other things, small businesses to keep paying workers. This funding ultimately saved many of those businesses from going under.
The Paycheck Protection Program was far from perfect, though. Many small businesses struggled to navigate the red tape and bureaucracies of the largest banks, while small businesses served by smaller local banks fared much better.
There was concern that certain groups of borrowers, such as business owners who were women and minorities, weren’t able to access the credit they needed. In fact, testing by the NCRC found that Black women were generally not encouraged to apply for a PPP loan at any financial institution they approached. Survey data from the Federal Reserve Bank of New York showed that Black- and Hispanic-owned small businesses that applied for a PPP loan during the pandemic were less than half as likely to be approved. The lack of a comprehensive data set on small business lending made it tougher to target funds to legitimate local businesses.
Oversight of pandemic efforts such as the Paycheck Protection Program was made more difficult because in many ways the government was flying blind. There was little viable data from lenders on how funds were being disbursed to applicants. Problems were hard to spot, and it was extremely difficult to identify and target the areas most in need of support. The Small Business Administration (SBA) did not include demographic questions on early rounds of PPP loan applications for nearly $500 billion in loan disbursements, which meant the SBA had little insight into the majority of disbursements to ensure the needs of all communities impacted by the pandemic were being met.
Community Reinvestment Act and the CFPB’s Small Business Lending Data Rule
Several federal laws require banks to demonstrate that they are meeting the credit and other financial needs of the communities which they serve. The Federal Deposit Insurance Act requires an evaluation of how the institution would meet the convenience and needs of its community before granting deposit insurance. Regulators are supposed to carefully weigh the impact on the community when evaluating applications under the Bank Merger Act. The National Bank Act requires national banks to provide “fair access” to financial services and fair treatment of customers.
Most importantly, the Community Reinvestment Act requires financial institutions to serve the needs of their entire communities, including low- and moderate-income households. All of these laws recognize and codify that banking is critical infrastructure for communities and vital plumbing for the economy.
As most of you are aware, there is a process ongoing right now to refresh the Act’s rules to ensure that banks are adequately meeting the needs of their community. The Federal Reserve, FDIC, and OCC last year issued a notice of proposed rulemaking to amend their regulations implementing the Community Reinvestment Act, with the final rule expected to come in the next few months.
As a member of the Board of Directors for the FDIC, I supported the proposed rulemaking change. In particular, I believe it is a great opportunity to assist rural communities across the nation that have been left behind. Shifting the Community Reinvestment Act’s focus to where banks are doing business, instead of just evaluating the areas where banks have a physical footprint, should help improve investment and banking services in so many communities that have seen a decline in branches. Other proposed changes would incentivize lending to very small businesses, which serve as the backbone of many rural communities.
The Community Reinvestment Act cannot work without good data. These agencies collect data to assess the performance of banks in meeting the credit needs of the communities in which they do business, including low- and moderate-income neighborhoods. A major change being considered by the agencies is for them to rely on the data CFPB will collect through a small business lending rule.
Today, the CFPB is finalizing that new small business lending rule which will require lenders across the country to report key data, including demographic data, on small business loan applications. In many ways, this rule is similar to the landmark Home Mortgage Disclosure Act, which requires collection and reporting of mortgage data. We have learned valuable lessons from our work with the Home Mortgage Disclosure Act that can help small businesses, make it easier for them to provide the data, and maximize usefulness of the data that is collected.
Through a new small business lending data set, the CFPB will, over time, make certain data public to give local communities, investors, governments, and others deeper insights into small business lending trends. It will help detect and deter lending discrimination. It will also allow programs like the Paycheck Protection Program to be designed more effectively and work more efficiently. And it will allow the Community Reinvestment Act to have more teeth when it comes to small business lending.
Here’s how it works. The small business lending rule implements an important provision of a law enacted by Congress in 2010. It will require banks, credit unions, and other lenders to provide information about loan applications, including whether they were approved or denied, demographics of the applicant, pricing, and more.
The small business lending rule facilitates the collection of subcategories. For example, applicants will be able to self-identify not just whether they are Asian American/Pacific Islander, but can also state whether they might be Indian- or Korean-American. This seemed particularly important given how frequently immigrants and minorities start small businesses and franchises. The limited data we have on small business lending suggests that there are important differences in access to small business credit across a range of demographic groups.
The data also suggest unmet needs among small businesses and farms in many rural and lower-income areas. Small businesses are especially important job creators in rural America, so the wealth of rural communities particularly depends on their small businesses and farms having fair access to credit. Providing fair and affordable access to credit is critical to rural America and other underserved communities.
When the Community Reinvestment Act was passed in 1977, the law applied strictly to banks as they made up the majority of lending operations. At the time, non-bank entities were largely nonexistent in the market. This has changed with, for example, nonbank mortgage lending outpacing mortgage lending by banks.
Our small business lending data collection will require both banks and nonbanks to provide timely credit application information to the CFPB.
The rule defines a small business as one with gross revenue under $5 million in its last fiscal year. Along with support from the Small Business Administration, we established this straightforward definition of what counts as a small business under the rule, so lenders can easily determine whether an applicant is covered. The information will eventually power a public database that will essentially serve as a census of small business lending in America. The impact of the rule will be in the comprehensive data that it produces, which can be used by lenders, borrowers, and the broader public to achieve better credit outcomes for small businesses and communities across the country.
We will phase in the collection requirements, by having the largest lenders report data first, and over time, lenders who make at least 100 loans per year will eventually report. While many will certainly seek to report early, we’re also planning a supplemental proposal to give some more time for financial institutions who already get high marks for meeting the credit needs of their communities. Under the proposed updates to the Community Reinvestment Act rules currently under consideration, banks would not have to separately provide small business data to their regulators. In other words, the data would serve multiple purposes and help to make small business lending fairer. We are also exempting loans that are reportable under the Home Mortgage Disclosure Act.
While applicants will be able to refuse if they don’t want to answer certain questions, lenders aren’t allowed to discourage responding. The CFPB intends to focus its oversight activities in connection with the new rule on ensuring that lenders do not discourage small business loan applicants from providing responsive data, including demographic information about their ownership. Lenders will be able to reuse certain data to minimize applicants repeatedly answering the same questions.
Protecting this data, and the privacy of applicants, is obviously critical. As we continue our work to release summary data and a public database, we will be working with experts and will have more details to share on how we will protect privacy interests and guard against the risk of reidentification.
None of this is revolutionary – in fact, it’s pretty obvious and it’s the law. You’re probably asking why it’s taken the CFPB over a decade to finish this rule. In fact, the California Reinvestment Coalition had to sue the CFPB a few years ago to make sure the agency actually implemented this data collection.
You’re probably also asking why it’s taken decades to update the rules under the Community Reinvestment Act. It’s definitely another good question. However, I expect that the federal banking regulators will soon finalize new rules that work in tandem with the CFPB’s new small business lending data rule. I also anticipate that state Community Reinvestment Act laws that cover nonbank lenders will eventually rely on this data, too.
There’s no good answer for the delays, but given what we saw during the pandemic, the cost to small business owners and local communities of not acting has been high.
Recent Bank Failures
Let me say a few words about the recent bank failures which also relate to the costs of inaction. When a small business fails, it’s bad. Customers and employees all suffer. When a local bank fails, it can be devastating to a local economy. This cuts off opportunities for so many other small businesses who are often overlooked or poorly served by bigger non-relationship banks. But when a massive bank fails, it can literally create chaos across the entire economy.
In the past month, we’ve seen the liquidation of Silvergate Bank and the failure of two very large banks, Silicon Valley Bank and Signature Bank. The government has taken some extraordinary measures to contain the collateral damage of these failures.
While there’s often close attention paid to the costs of supervision and regulation of financial institutions, we must focus our microscope on the costs of not supervising and regulating risky businesses.
Financial institutions have a special responsibility to their local communities and the broader economy. The increased benefits that banks and nonbanks have received over the years, particularly during the pandemic, from direct and indirect government support, have put into clearer focus the need to ensure they meet their legal obligations when it comes to meeting the needs of local businesses.
Just like having small business lending data feels like common sense, it’s also common sense for our financial institutions to follow the law and uphold fair standards to best serve their communities – especially after benefiting from so much in public support.
In the coming weeks and months, everyone will need to come up with answers on how we make sure that we live up to these goals.
In closing, as we think about how to create a thriving and fair economy, we must not lose sight of the role local financial institutions can play to help small businesses start up, grow, and thrive. We do not want to live in a country that is dominated by just a handful of companies. Instead, we want to ensure that our financial system is promoting opportunities for all. Thank you.