Joint ABA/State Bankers Association 1071 Letter to CFPB

Consumer Financial Protection Bureau
1700 G Street, NW
Washington, DC 20552

Dear Director Chopra:

The American Bankers Association and 51 state bankers associations, (the Associations) appreciate the opportunity to comment on the Consumer Financial Protection Bureau's notice of proposed rulemaking to implement section 1071 of the Dodd Frank Wall Street Reform and Consumer Protection Act (the proposal). Section 1071 amends the Equal Credit Opportunity Act (ECOA) to require financial institutions to collect and report to the Bureau certain data regarding applications for credit made by small businesses, including women-owned businesses and minority-owned businesses.

Summary of the Comment

The Associations support the goals of section 1071, which are to facilitate enforcement of fair lending laws and to help regulators and the public identify opportunities for community development. Our members oppose discrimination in any form, and support enforcement of fair lending laws. Likewise, banks support community development by investing in the neighborhoods they serve, for the improvement of those communities, the businesses that operate there, and the families who live and work there.  

The proposal includes a lengthy, yet largely conjectural, analysis of the costs and benefits of the proposed data collection regime. The Bureau estimates that the one-time costs of implementing the regulation would be between $312 million and $323 million for depository and non-depository institutions, and it estimates ongoing annual costs of between $372 million and $392 million, respectively. The Bureau contrasts these costs with the net income per origination and per application, for small business loans, without explaining how it calculated net income.  Unsurprisingly, the Bureau concludes that these cost estimates, which experience demonstrates likely understate actual costs, do not outweigh the benefits to fair lending enforcement. 

The Associations and others have repeatedly expressed concern about the costs of the rule, to little or no avail. Small Entity Representatives (SERs) and other stakeholders told the Bureau its cost estimates for the outline of proposals considered during the Small Business Regulatory Enforcement Fairness Act (SBREFA) review were too low, and yet it has made no changes in response. Instead, the proposal recites feedback received during the SBREFA process indicating that its estimations of certain costs are too low. Similarly, the proposal recites comments on the Bureau's 2017 Request for Information that raised concerns about the cost of implementing 1071. Disappointingly, the proposal simply seeks additional comment without explaining why the comments on costs have been ignored.  

The proposal fails to consider the cost of duplicative and burdensome data collection and reporting. For example, covered banks that meet data reporting thresholds for HMDA and CRA will be collecting and reporting data on a single application or loan for all three data reporting obligations, but not in the same way. In addition, the Bureau’s cost estimates do not factor in the additional annual costs for fair lending compliance. The 1071 data will offer increased opportunities for examiners to rely on statistical analysis to assert discrimination in small business lending. To be prepared to respond to anticipated disparate impact claims, banks will need to devote considerable additional resources to expanded fair lending compliance programs. 

The increased costs associated with the 1071 rule will reduce competition in the small business credit market, despite the Director's statements about the importance of competition in financial services.  Over time, the 1071 rule will drive further consolidation, and the gradual loss of community banks. Reduced competition will lead to fewer choices and higher prices for small businesses. Non-banks will absorb some of the small business lending done today by banks, but they will not be able to offer their customers the benefits of a banking relationship and the technical assistance banks provide to their small business customers. 

While understating the costs of the rule, the proposal also overstates the rule's benefits for fair lending. Experience with PPP shows that most small business applicants will decline to provide demographic information or leave questionnaires blank; therefore, the data on race and ethnicity of business owners will be flawed. Records with missing demographic data will either be excluded from fair lending analyses, or data users will have to use proxies for race and ethnicity to try to identify fair lending issues. These problems call into question the benefit of the data collection, and whether the costs are justified by the benefits. 

The Bureau seeks to address the prospect of missing demographic information by requiring lenders to identify business owners' race and ethnicity by visual observation or surname when the applicant declines to provide the information. This practice is antithetical to section 1071, which clearly expresses Congress’ intent for an applicant to have the right to choose whether to provide any of the information requested.  It will also yield wildly inaccurate data on race and ethnicity. Nevertheless, regulators, advocates, and investigative reporters will rely on it to target lenders for fair lending concerns.

Small businesses will also see their privacy significantly eroded once the Bureau releases the 1071 data to the public. Under the proposed rule, application-level data submitted by financial institutions will be publicly available on the Bureau’s website, subject to modification by the Bureau to protect privacy. There is little question that data users will be able re-identify small businesses with just two of the proposed data points—census tract and NAICS code. Publication of other data points may disclose sensitive personal financial information or confidential business information about an applicant. This will undermine small business owners’ privacy, increase fraud, and encourage the aggregation, sale, and use of information without small businesses having any ability to control the use of their information. 

Although the Bureau proposes to study re-identification risk and to employ a “balancing test” to assess the risks and benefits of public disclosure, it does not plan to allow the public to comment on the study or the decisions the Bureau makes on redaction or modification. The Associations strongly recommend that the Bureau reconsider this plan, and urge the agency to initiate an Administrative Procedure Act (APA) compliant rulemaking to determine which data can be publically released without sacrificing small business owners’ privacy. 

Download the letter to read the full text.