Banking industry leaders are suing to dismantle a crucial new data collection effort designed to root out discrimination in small business lending. Their facts are wrong. Their motives are suspect. And the public should understand the mischaracterizations that undergird their lawsuit. The outcome of this highly technical dispute will have ripple effects for every participant in the US economy, not just lenders and business owners.
Data affects so much of our everyday lives. Our streets are saturated with data points covering traffic flows that GPS apps use to find our best routes. Services like Spotify and Netflix use data to create targeted recommendations based on our tastes. Tune in to any sporting event and you’ll see coaches holding tablets on the sidelines, using data to develop game plans and make adjustments. Data is also used to ensure equal access to credit and that we all have the same opportunities to improve our economic situation, such as information on the outcomes of mortgage lending required by the Home Mortgage Disclosure Act.
But another key category of economic data – lending to small businesses – is nearly invisible to regulators, business owners and the public. We currently know very little about how entrepreneurs are treated when they need capital to grow their businesses.
Blind spots in lending hurt us all. They make it harder to detect discrimination, which NCRC has found to be prevalent in small business lending today. Lack of small business data hurts lenders too since they do not know how their lending to underserved businesses stacks up to peers, as well as making it harder to evaluate the impact of new products or initiatives designed to reach more small businesses, or a specific type of business such as restaurants or retail.
Section 1071 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act included provisions to eliminate this blind spot. It required lenders to deliver data on small business lending to the government, and the government to make that data public. It took more than a dozen years for those instructions from Congress to be implemented in a rule finalized in March 2023 by the Consumer Financial Protection Bureau.
Now banks are trying to delay it even further. A lawsuit filed by the Texas Bankers Association and Rio Bank and later joined by the American Bankers Association seeks to repeal the final 1071 rule before it is even implemented.
The lawsuit makes three main arguments:
- The CFPB’s funding structure is unconstitutional.
- The CFPB dramatically increased the number of data points.
- The CFPB failed to account for allegedly high compliance costs to lenders.
The first of these spurious arguments bears little fresh discussion here. The Supreme Court will soon weigh in on the CFPB’s funding structure in another case. The Court should find that the CFPB’s structure is constitutional and similar to other financial regulators at the federal and state level, just as the 2nd Circuit has held and as 144 current and former members of Congress have attested. You can find more of our analysis on the CFPB’s structure here, but let’s turn to the other arguments in the lawsuit.
The suit’s second core claim takes more unpacking to debunk. The lawsuit asserts that the CFPB acted improperly by building 81 data points into the final rule even though there were just 13 data points required in the statutory text of Section 1071. But Congress gave the CFPB authority to add additional data points that would aid in fulfilling the purpose of 1071 to root out discrimination and identify community needs.
The lawsuit misrepresents how we got to 81 data points in the final rule. That figure comes from a chart the CFPB released as a reference tool for lenders. The chart shows that 37 of the data points – nearly half of the total – relate to race, ethnicity and gender. Everyone agrees that that information is fundamental to 1071’s purpose. The high number of data points on demographic information is due to how 1071 will report data broken down by race and ethnicity. This robust approach allows applicants to disaggregate their race and ethnicity by nationality in the same way similar data is collected and reported from mortgage lending – precisely the sort of thing that Congress invited the agency to do to ensure 1071 achieved its goals. This creates a large amount of data points, but in practice, these data points are simply additional categories on a form and will not significantly increase costs to lenders to set up.
The lawsuit also inaccurately describes the CFPB’s role in creating the data points. About two-thirds of the 81 data points listed in that chart were required by Congress in the Dodd-Frank Act. Only 25 (31%) were added by the CFPB. More than half of the 25 data points added by the CFPB are about information on the final cost of the loan to the borrower, such as interest rates and fees. Cost information is vital for fulfilling the purpose of 1071 to detect for discrimination. A rule that shows who is getting loans but not how much they are paying for their credit would be useless for curbing discrimination in lending.
The third pillar of this fresh attack on the agency – the banks’ claims about compliance costs – also crumbles under scrutiny. The lawsuit ignores the many ways the CFPB responded to feedback from lenders in developing the final rule. From the lawsuit:
“[T]he Bureau c[ould] only estimate how ongoing costs would be different,” but suggested that “going from 13 statutory data points to 81 in the Final Rule would increase compliance costs by $10,000,000 per year.” 86 Fed. Reg. 56354. (Quotation marks and citation from lawsuit complaint, page 12)
The suit’s scaremongering cost number does not line up with any of the cost estimates the CFPB actually provided in the final rule or the earlier notice of proposed rulemaking. There is no statement from the CFPB to that effect online, and the provided citation is inaccurate.
The lawsuit claims that the CFPB did not distinguish between differences in the size of banks, or respond to industry feedback submitted during the CFPB’s request for comments. This, too, is false.
The CFPB’s cost-benefit analysis separated banks into three different groups based on the number of small business loans they originate, and came up with specific one-time and ongoing costs for each different category. The lawsuit criticizes the cost estimates provided by the CFPB because their survey of lenders asked for expected costs of collecting the data points required by the Dodd Frank Act – which, again, constitute 69% of all the data points in the final rule. The CFPB surveyed lenders early on in the rulemaking process and had not yet determined which additional data points were needed to fulfill the purpose of 1071.
The agency took the industry feedback seriously, making multiple significant changes in lenders’ favor. The CFPB not only increased their cost estimates to reflect industry feedback, they also increased the reporting threshold from 25 loans per year in the proposed rule to 100 in the final rule, effectively exempting 2,200 of the smallest lenders from complying with the rule altogether.
Focus too much on cost alone, though, and you might forget the reason lenders make loans in the first place. They do it to make money. Lenders’ costs are minimal compared to the income they generate. Any assessment of cost must also look at benefit, including social benefit.
The CFPB provided estimates of net income from making small business loans for three different categories of banks, and these estimates were unchallenged in the lawsuit. One-time and ongoing costs combined for lenders that originate at least 100 loans a year comes out to 0.5% of annual net income from originating small business loans. After the one time costs this drops to just 0.06% going forward. Even with the higher compliance cost of $100,000 cited in the lawsuit, this still comes out to just 0.75% of CFPB-estimated revenue for lenders that originate 100 loans a year, and if they originate less than that the rule wouldn’t apply to them in the first place. Surely 0.75% of annual net income from making small business loans is worth the cost of getting small business lending data to 21st Century standards.
The banking industry has waged a political and legal war on the CFPB ever since its founding. This new lawsuit over 1071 rules is only the latest evidence that some banks will hide behind false arguments about cost, when what they really fear is transparency and the accountability that comes with it. The benefits of ensuring that all entrepreneurs have access to capital far outweigh the costs. Small business lending is simply too important to leave in the shadows.
Kevin Hill is a Senior Policy Advisor at NCRC.