Last month, Richard Codray, director of the Consumer Financial Protection Bureau (CFPB), speaking at a Small Business Lending Field Hearing in Los Angeles, stated that his agency was launching an inquiry into the small business lending landscape as “a first step toward crafting this mandated rule to collect and report on small business lending data.” In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act created the CFPB and included a requirement for financial institutions to collect and submit data to the CFPB on credit applications by women-owned and minority-owned small businesses, including geographic and demographic indicators. With the release of a white paper and a request for information, the CFPB is now beginning the implementation and rulemaking process.
For the past few years, we have seen a rise in online small business lenders. As explained in our report published early this year, these companies offer small business owners quick and easy financing through online portals. The catch is that many of these loans come with very high interest rates and hidden fees, with the true cost of the loans obscured. Borrowers find themselves unable to pay, take on additional loans to make up for it (known as ‘loan stacking), and end up in a cycle of debt.
The CFPB’s effort is the first step toward truly understanding the small business market, and developing the appropriate regulations to stem predatory or harmful lending practices. As stated in the white paper, the purpose of the data collection mandate “pertains to facilitating the enforcement of fair lending laws. Data is needed to understand the nature and extent of potential disparities and to ensure women-owned and minority-owned businesses have non-discriminatory access to capital.”
But it is particularly important now, as the ability of the CFPB to address concerns and enforce regulations is uncertain. The Financial Choice Act, which was introduced in the House of Representatives in September 2016, includes a number of provisions that diminish the CFPB’s and authority. It also includes provisions that would limit the effectiveness of the CFPB as an independent agency. As enumerated by CFPB:
- Limit rule-making authority to respond to threats against consumers
- Repeal the Unfair, Deceptive, or Abusive Acts and Practices (UDAAP) authority, which holds bad financial actors accountable
- Repeals advisory boards, supervision and market monitoring powers
- Prohibits regulating payday, auto-title or other forms of small-dollar lending
- Eliminates certain offices and functions, including consumer education and research
- Blocks the CFPB from making the consumer compliant database public
If the Financial Choice Act is passed, not only will the CFBP be prohibited from furthering its efforts to monitor and regulate small business lending, it will completely reverse the work done to regulate all types of predatory lending. It would also override state laws where regulations are in place to protect consumers from these harmful practices, such as in North Carolina.
The Financial Choice Act is expected to be vote on by the House as early as next week. Let’s hope that our elected officials can keep in mind the lessons learned from the Great Recession, and ensure that all Americans have access to fair and safe financial products.