NAFCU Witness Asks Congress to Ensure CFPB Reporting Exempts Small CUs

Financial services industry witnesses submit written testimony ahead of House Subcommittee hearing on new rule governing small business lending.

The CFPB’s proposal to collect small business lending data from financial institutions is so flawed that if the agency does not make large changes, Congress should step in, a credit union official will tell a House subcommittee on Tuesday.

“The Bureau acknowledges that some credit unions, faced with the proposed rule’s significant onetime and ongoing compliance costs, may simply be forced to exit small business lending altogether,” Michael Wilson, chief experience officer of Members 1st Federal Credit Union, Pennsylvania, told the subcommittee in written testimony. He will be representing NAFCU at the hearing.

Background and Context

Within the next few days, the CFPB is expected to issue its final rule implementing Section 1071 of the Dodd-Frank Act. The section of the law was intended to require financial institutions to report small-business lending in an effort to determine if credit unions or banks discriminated against women- and minority-owned businesses.

The House Small Business Committee’s Economic Growth, Tax and Capital Growth Subcommittee is scheduled to receive testimony on the potential impact of the rule on Tuesday.

“The committee is concerned that this rule may affect access to and the cost of credit for small businesses and that it will be overly burdensome for small financial institutions to implement,” the panel’s Republican majority staff said in a memo for the hearing, whose title raises the question of whether the rule could lead to the death of relationship banking.

NAFCU’s Witness Testimony

In his written testimony, Wilson called on the CFPB to exempt small financial institutions from the rule.

Under the proposed regulation, any financial institution that originated at least 25 covered credit transactions for small businesses in each of the two preceding calendar years would be required to report its lending activity.

That is far too low and would require very small institutions to report their data, Wilson said. Further, if the bureau does not increase that number, Congress should enact legislation limiting the scope of the rule.

“Failure to do so would threaten access to credit for many of our nation’s main street small businesses who rely on community lenders like credit unions to meet their capital needs,” he stated.

Wilson added that the proposed rule would require, under certain circumstances, a credit union employee to make demographic assumptions based on visual observation.

“NAFCU unequivocally opposes the Bureau’s adoption of any regulation or examination practice that operates to require that any individual make any visual observation concerning any protected demographic information or similarly sensitive data of a small business applicant’s owners,” he said.

Wilson noted in addition that the unique design of credit unions, such as the Member Business Lending cap, could skew some of the required data.

Community Banking Witness

Witnesses representing community banks agreed that the cost of compliance with the rule would be passed on to the borrower.

“If the Bureau fails to exempt more community banks and business borrowers, the result will be increased compliance costs for community banks and a higher cost of credit for small business borrowers,” wrote Lucas White, president of the Fountain Trust Company, a community bank in Covington, Ind.

He added that MDIs and CDFIs should be exempt from the regulation because they already have demonstrated that they are serving the populations targeted under the rule.

Witness in Support of Rule

Luz Urrutia, CEO of the CDFI Accion Opportunity Fund, was the lone witness testifying in favor of the reporting requirements.

She said in her testimony that increasing lending to small businesses is a bipartisan priority and added that the rule would accomplish that goal.

“As we implement this well, we will finally be able to increase access to capital for small businesses and create a more transparent and successful financial services system,” she wrote.