[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
THE END OF RELATIONSHIP BANKING? EXAMINING THE CFPB'S `SMALL BUSINESS
LENDING DATA COLLECTION' RULE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON ECONOMIC GROWTH, TAX, AND CAPITAL ACCESS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
MARCH 28, 2023
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 118-006
Available via the GPO Website: www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
51-443 WASHINGTON : 2023
HOUSE COMMITTEE ON SMALL BUSINESS
ROGER WILLIAMS, Texas, Chairman
BLAINE LUETKEMEYER, Missouri
PETE STAUBER, Minnesota
DAN MEUSER, Pennsylvania
BETH VAN DUYNE, Texas
MARIA SALAZAR, Florida
TRACEY MANN, Kansas
JAKE ELLZEY, Texas
MARC MOLINARO, New York
MARK ALFORD, Missouri
ELI CRANE, Arizona
AARON BEAN, Florida
WESLEY HUNT, Texas
NICK LALOTA, New York
NYDIA VELAZQUEZ, New York, Ranking Member
JARED GOLDEN, Maine
KWEISI MFUME, Maryland
DEAN PHILLIPS, Minnesota
GREG LANDSMAN, Ohio
MORGAN MCGARVEY, Kentucky
MARIE GLUESENKAMP PEREZ, Washington
HILLARY SCHOLTEN, Michigan
SHRI THANEDAR, Michigan
JUDY CHU, California
SHARICE DAVIDS, Kansas
CHRIS PAPPAS, New Hampshire
Ben Johnson, Majority Staff Director
Melissa Jung, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Dan Meuser.................................................. 1
Hon. Greg Landsman............................................... 2
WITNESSES
Mr. Troy Peters, President and Chief Executive Officer, JBT,
Jonestown, PA.................................................. 6
Mr. Lucas White, President, The Fountain Trust Company,
Covington, IN.................................................. 8
Mr. Michael Wilson, Chief Experience Officer, Members 1st FCU,
Enola, PA...................................................... 9
Ms. Luz Urrutia, Chief Executive Officer, Accion Opportunity
Fund, San Jose, CA............................................. 11
APPENDIX
Prepared Statements:
Mr. Troy Peters, President and Chief Executive Officer, JBT,
Jonestown, PA.............................................. 28
Mr. Lucas White, President, The Fountain Trust Company,
Covington, IN.............................................. 31
Mr. Michael Wilson, Chief Experience Officer, Members 1st
FCU, Enola, PA............................................. 38
Ms. Luz Urrutia, Chief Executive Officer, Accion Opportunity
Fund, San Jose, CA......................................... 61
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
Center for Responsible Lending (CRL), the National
Association for Latino Community Asset Builders (NALCAB),
and the National Coalition for Asian Pacific American
Community Development (National CAPACD).................... 65
Colt Energy, Inc............................................. 69
Consumer Bankers Association (CBA)........................... 70
Consumer Financial Protection Bureau......................... 75
Honorable Greg Landsman--CFPB Symposium Report............... 123
Independent Community Bankers of America (ICBA).............. 131
National Association of Federally-Insured Credit Unions
(NAFCU).................................................... 171
National Community Reinvestment Coalition (NCRC)............. 186
NCRC Fact Sheet.............................................. 191
Responsible Business Lending Coalition (RBLC)................ 197
Testimony of Nick Powell, Chairman, Colt Energy.............. 201
THE END OF RELATIONSHIP BANKING? EXAMINING THE CFB`S `SMALL BUSINESS
LENDING DATA COLLECTION' RULE
----------
TUESDAY, MARCH 28, 2023
House of Representatives,
Committee on Small Business,
Subcommittee on Economic Growth,
Tax, and Capital Access,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:01 a.m., in
Room 2360, Rayburn House Office Building, Hon. Dan Meuser
[chairman of the Subcommittee] presiding.
Present: Representatives Meuser, Williams, Luetkemeyer, Van
Duyne, Alford, LaLota, Landsman, Velazquez, Chu, and Davids.
Chairman MEUSER. All right. This hearing will come to
order. Thank you. Thank you. This is the Subcommittee on
Economic Growth, Tax, and Capital Access. This meeting has now
come to order.
Without objection, the Chair is authorized to declare a
recess of the Committee at any time.
I will now recognize myself for my opening statements. The
title of this hearing is ``The End of Relationship Banking:
Examining the CFBP's Small Business Lending Data Collection
Rule.''
Again, good morning, and welcome to this hearing, examining
the Biden Administration's continued regulatory overreach and
its very harmful impact on America's small business economy.
First, I want to thank our witnesses very much for being
here today. We appreciate you taking the time to join us and
sharing all of your insights.
Today's hearing addresses a vital part of our country's
economy, small community lending institutions and the role they
play in assisting our small businesses. As we meet here today,
the financial institutions across the country are actively
engaged as we know in lending to main street America and our
nation's entrepreneurs who are in the process of starting their
own businesses.
As our witnesses will discuss with the Subcommittee, the
relationships between local lenders and the businesses in their
communities takes years to build and refine. These community
lenders are also the ones best suited to determine the
structure of the loans that provide to their customers personal
touch, knowing the customer, that it is impossible for a large
national institution to replicate.
Unfortunately, President Biden's Consumer Financial
Protection Bureau (CFPB) is poised to throw another wrench into
this vital aspect of our economy. The CFPB is proposing to
implement a new rule, the Small Business Lending Data
Collection Rule, that will impose burdensome new reporting
requirements that would harm small business lending. This rule
will alter the behavior of small financial institutions and
make them hesitant to continue lending to small businesses
based on their long-established relationships with main street
America.
This rule was born out of an obscure provision in Dodd-
Frank almost 13 years ago. Most Members of Congress were too
busy debating too-big-to fail to even pay attention or realize
it was in there.
Making matters worse, this rule will add an even larger
regulatory cost burden to these small financial institutions
that are already struggling to keep up with the Biden
administration's costly regulatory agenda. According to the
SBA's Office of Advocacy, this rule, ``may be unnecessarily
burdensome to small entities, may impact the cost of credit for
small businesses, and may lead to a decrease in lending to
small, minority- and women-owned businesses.'' This is from the
Office of Advocacy. The Office of Advocacy also estimates that
the rule will have an initial $126 million impact on small
financial institutions, and then going forward, an annual
impact of $153 million. Unlike mega-banks that can absorb such
costs, these will crush smaller institutions that do not have
the budget to absorb such new regulatory burdens. The Office of
Advocacy also expressed concern that this rule failed to
properly consider alternative, less burdensome alternatives to
the rule. These alternatives should have included exempting the
smallest lenders but were never seriously considered.
The rule also creates racial profiling issues, privacy
concerns, an unrealistic implementation window, and mandates
excessive data collection of small business owners. In the
digital age we live in, such personal information in the hands
of so many different entities should give all of us, especially
the CFPB, pause on such requirements.
At a time when main street America is dealing with
unprecedented levels of inflation, interest rates that are
being raised at the fastest pace since the 1980s, supply chain
disruptions, and a prolonged labor shortage, adding more
burdens to our country's job creators, and our banks, is the
last thing the CFPB should be doing, but that is exactly what
the Bureau and the Biden administration seem determined to do.
Our small businesses and local community lenders deserve so
much better.
Without objection, I would like to enter into the record
letters detailing the impact this rule would have on small
business lending from the National Association of Federal
Credit Unions, International Community Bankers Association, the
Consumer Bankers Association, and the American Bankers
Association. It seems this rule has brought community banks and
credit unions together. So I guess there is a silver lining
here somewhere.
With that I will yield to our Ranking Member from Ohio, Mr.
Landsman.
Mr. LANDSMAN. Thank you, Mr. Chairman, for holding this
very important hearing and examining the CFPB's small business
lending role and examining ways to create a much more fair and
successful equitable lending system. For far too long, women-
and minority-owned small businesses have experienced obstacles
to accessing capital. Part of the reason is the lack of data
and transparency related to small business lending.
The scant data that exists continues to show that these
businesses lack the same access to external financing when
compared to traditionally owned firms. And during hard economic
times, the barriers to access capital are even greater.
According to the CFPB, minority- and women-owned small
businesses were disproportionately hurt by the pandemic because
they had fewer cash reserves and faced deeper hurdles to
accessing capital.
The Paycheck Protection Program highlighted the disparities
between these white-owned businesses and businesses of color.
The Federal Reserve Bank of New York found that the PPP loans
only reached about 20 percent of the eligible firms in states
with the highest densities of black-owned firms. The report
confirmed what we already suspected, the presence of racial
disparities in banking relationships and significant gap and
credit access in underserved communities.
Section 1071 of Dodd-Frank passed over a decade ago
attempts to remedy this situation by requiring financial
institutions to simply collect and report on the demographics
of small business owners applying for financing. Doing so
facilities the enforcement of fair lending laws and identifies
business and community development needs for small businesses.
I am encouraged that the CFPB will be issuing a final rule
in the next few days. It has been a long 12 years to get to
this point which included a lawsuit to prevent the previous
administration from intentionally delaying this rule. The CFPB
has conducted considerable outreach to small firms which
included convening of the Small Business Regulatory Enforcement
and Fairness Act panel in October 2020 to hear suggestions and
recommendations for small entity representatives. This, in
addition to adhering to the required APA notice and comment
process where the agency considered thousands of comments from
the public. There are going to be discussions today that this
rule discourages small financial institutions from making loans
to small firms. I for one do not agree with that conclusion.
Just like the data requirements for HMDA do not negatively
impact the mortgage lending industry, this rule will not be
detrimental to small businesses' lending market. It is my hope
that this rule will actually increase lending to small
businesses in general.
With that said, Mr. Chairman, I would like to request to
enter into the record a report titled ``Addressing the gap in
consumer protection for small business consumer through
multiple research program,'' which includes the data collected
is essential to combat institutional systemic discrimination
and the costs associated with the rule far outweighed by the
need to create a more transparent system for small business
lending in this marketplace.
So this is a motion to enter this into the record.
Chairman MEUSER. Without objection.
Mr. LANDSMAN. Thank you, Mr. Chairman, and I yield back.
Chairman MEUSER. Thank you again.
I now recognize Mr. Williams of Texas, the Chairman of the
Full Committee for his remarks.
Mr. WILLIAMS. Good morning. I want to thank all the
witnesses for being here today. And I want to thank my
colleague, Dan Meuser, my friend also, for holding today's
Small Business Subcommittee on Economic Growth, Tax, Capital
Access hearing on the CFPB's 1071 rule.
Today's hearing is critical to examining the future of main
street America. Banks are the lifeblood for small businesses
looking to grow or expand their operations, and I can tell you
as a small business owner for over 52 years, I can tell you
there has not been a day in my life where I have not owed a
community bank money. And I do not think there is another
agency in Washington that brings and causes more anxiety and
nervousness to small businesses than the CFPB. This agency is
quick to issue fines and enforcement actions against businesses
and financial institutions without ever telling them the rules
of the road before they are penalized. This regulation by
enforcement is detrimental to main street businesses that crave
certainty.
So this 1071 rule looks to make this problem even worse.
Financial institutions are going to have to dedicate
significant time and resources in order to comply with this
overly burdensome new data reporting regime. We need more loan
officers in our lending institutions and credit unions and not
more compliance officers, and we are looking to get more money
into the hands of job creators instead of needing to hire more
compliance officers like I said that are nothing but a drain on
our bottom lines.
So with that, I am looking forward to today's discussion,
and I hope we can shine a light on the most harmful aspects of
this very harmful rule that will be finalized any day now.
So Mr. Chairman, thank you, and I yield the time back.
Chairman MEUSER. Thank you very much, Mr. Chair. I
appreciate you being here with us this morning.
So I will now introduce our witnesses.
Our first witness today is Mr. Troy Peters. He resides in
my district. Mr. Peters is the president and CEO of Jonestown
Bank and Trust, which is celebrating its 150th anniversary this
year. Headquartered in Jonestown, Pennsylvania, which is in my
district, the bank's primary focus is on lending to small
businesses and retail banking. Mr. Peters knows firsthand how
vital banks like his are to the local community and being
readily able to provide a line of credit, and by extension, a
line of opportunity for someone to pursue their dream of
opening small businesses. And what will be a common theme in
today's hearing, the CFPB's Small Business Lending Data
Collection Rule will have a major adverse effect on both Mr.
Peters' bank and the local communities he has dedicated himself
to serving. With a career spanning over 30 years, Mr. Peters
has indispensable knowledge of the community banking industry
and will provide firsthand experience of how this rule will be
another blow to our country's small banks and main street
America. Mr. Peters, thank you for joining the Committee today.
It is now also my honor today to introduce our next
witness, Mr. Lucas White. Lucas White is a fourth generation
community banker and an active Member of his community. He has
served as president of The Fountain Trust Company since 2016, a
$600 million community bank with five locations in Fountain
County, Indiana. Mr. White is also Chairman-elect of the
Independent Community Bankers of America (ICBA), a national
trade association focused on advocating on behalf of more than
5,000 community banks across the United States. At ICBA, Mr.
White is a Member of the executive committee and a board of
directors and is Chairman of the Federal Delegate Board. He is
also a Member of the ICBA's Policy Development Nominating
Committee. So thanks very much for being here with us. Also,
while graduated from Indiana University with a bachelor's
degree in philosophy and Indiana University-Bloomington, Morris
School of Law years later, Mr. White still actively practices
law in the family firm of White and White Attorneys today.
Community banks channel local deposits into main street America
and help spur job creation, foster innovation, and assist in
fulfilling the American dream for many entrepreneurs. Mr.
White's extensive career knowledge in community banking makes
him well informed about the issues facing small businesses in
main street communities today. Mr. White, again, thank you for
making the trip and being with us.
It is now my honor to introduce our next witness, Mr. Mike
Wilson, to today's hearing. Mr. Wilson is the chief experience
officer for Members First Federal Credit Union headquartered in
Enola, Pennsylvania, just outside my district. Members 1st over
a half million Members, 60 branch locations across 9 counties
in Central Pennsylvania, including in the great 9th District of
Pennsylvania. Mr. Wilson's role is crucial as he is responsible
for ensuring exceptional Member experience on behalf of the
entire credit union. He does this through providing leadership
and direction for the credit union's retail operations,
customer service areas, we well as public relations, marketing,
community outreach, internal and external communications, and
financial literacy. Mr. Wilson, you sound like you are kind of
a busy guy. Mr. Wilson graduated from Central Penn College with
a bachelor of science in business and went on to earn his MBA
from Eastern University. Through his passion for people and
entrepreneurial thinking, Mr. Wilson has been recognized for
his professional accomplishments with numerous business awards,
including Emerging Business Leader of the Year to the
Harrisburg Regional Chamber and Capital Region Economic
Development Corporation. Mr. Wilson's extensive career and
dedication to his community through local banking makes him as
well informed as anyone about the issues facing small
businesses and main street communities today. Mr. Wilson, we
thank you for joining the Committee today and we are looking
forward to your testimony very much.
I now recognize the distinguished Ranking Member, Mr.
Landsman of Ohio, to introduce his witness for today's hearing.
Mr. LANDSMAN. Thank you, Mr. Chair.
Our final witness today is Ms. Luz Urrutia, CEO of the
Accion Opportunity Fund, which is a nonprofit CDFI located in
California focused on national microlending strategy to meet
the needs of small businesses. She has spent her career in
banking and financial services, particularly in underserved
markets. Prior to joining Accion Opportunity Fund--I think it
is Accion. Did I get that--sorry, my fault. She worked for
Dollar Financial Group as CEO for the Americas. In this role
she helped transform the organization into a responsible
consumer finance business for underserved communities. She has
served on the CFPB's Consumer Advisory Board, the Consumer
Advisory Council of the Federal Reserve Bank, and the Board of
the Financial Health Network. And on the SBREFA panel that
examined the CFPB Small Business Lending rule which is the top
of the hearing today. Recently, she received the Latino
Leadership Award for the Silicon Valley Business Journal. Ms.
Urrutia received a bachelor of science in Business
administration and finance and an MBA from Georgia State
University. Thank you for joining us. We look forward to
hearing your testimony.
Chairman MEUSER. Thank you, Ranking Member Landsman. Nice
to have you with us.
So before I recognize our first witness, I remind the
witnesses that oral testimony is restricted to 5 minutes in
length. When the light in front of you turns yellow you have 1
minute remaining. When the light turns red, you are over time
and need to conclude your testimony as quickly as possible.
I do now recognize Mr. Peters for his 5 minute opening
remarks. Troy?
STATEMENTS OF TROY PETERS, PRESIDENT AND CEO, JBT; LUCAS WHITE,
PRESIDENT, THE FOUNTAIN TRUST COMPANY; MICHAEL WILSON, CHIEF
EXPERIENCE OFFICER, MEMBERS 1ST FCU; LUZ URRUTIA, CHIEF
EXPERIENCE OFFICER, ACCION OPPORTUNITY FUND
STATEMENT OF TROY PETERS
Mr. PETERS. Chairman Meuser, Ranking Member Landsman,
Chairman Williams, and Members of the Subcommittee, I am Troy
Peters, President and CEO of Jonestown Bank and Trust Co. (JBT)
headquartered in Jonestown, Pennsylvania. I testify today on
behalf of the Pennsylvania Association of Community Bankers,
and I also am a Member of ICBA. My bank is celebrating its
150th anniversary this year. Our name has never changed. We
have nearly $900 million in assets, 11 full-service branch
locations, and 160 employees. Our focus is on small business
and retail banking. We are also active in indirect auto
lending, and we serve the legal cannabis related businesses
throughout Pennsylvania and surrounding states.
Community banks like mine provide the bulk of all small
business loans in America. We are different than large banking
institutions that operate under a contrasting business model
that focuses on large companies and loan sizes. Main street
businesses, like my customers, prefer to work with a local
community bank because we are relationship lenders. We
intimately know our markets and our customers.
The CFPB's Small Business Lending Data Collection rule is
unfortunately squarely aimed at smaller banks like mine. We are
disproportionately disadvantaged to take on additional system
and personnel costs associated with compliance to this rule.
Now, although much of the costs would need to be passed on to
the borrower, it continues to promote further bank
consolidation, which means fewer local community banks to serve
the small business segment.
When my career began, this country had over 12,500 banks.
Today there are just over 4,000. Now, due to consolidation, a
small business's access to capital is being pushed into
metropolitan markets where relationship banking just does not
count for much.
I also worry about the integrity of the data to be
collected. In most cases, when a small business is seeking
financing, they are looking for the best solution and talking
to multiple lenders. Five banks could be collecting this data,
but only one will fund the loan. Each bank would be reporting
the data, which would make drawing any meaningful conclusion
difficult at best.
Small business loans are tailored to the specific
business's needs and it would be very difficult or impossible
to collect the exact data points to tell the entire story of
the structure, pricing, or counteroffers. There are just too
many variables to these loans. They are not as homogeneous as,
say, car loans. Making application and loan data public would
certainly be objectionable to my clients and it is quite
concerning. Publicly displaying sensitive information, like how
much money they applied for, what the purpose of the loan is,
and their revenue number is not the kind of information they
want or expect to be made public from a private transaction.
This disclosure could also create a competitive
disadvantage for them, such as revealing a planned business
investment. Even worse, publishing information that a sole
proprietor's loan request was denied in a small community like
ours, is akin the posting a bounced check to the wall behind
the store cash register. The public humiliation shouts, ``Do
not do business with this person; they are a deadbeat!'' My
customers adamantly do not want this.
I have customers like Jay. Jay came to our country seeking
opportunity, and after years of hard work and savings, he was
able to open his own small business near our town of 1,900
people where my bank is headquartered. A few years ago, when
the qualified mortgage (QM) rule was implemented, Jay was ready
to build his modest dream home. As a long-time customer, I
would have loved to help him achieve this dream, but his
mortgage request did not comply with the QM rules. And without
access to the traditional banking system, Jay turned to an
unregulated, hard money lender. His interest rate was higher
the loan did not come with complete disclosure, flexible terms,
or collection practices.
I feel like this rule will cause similar unintended
consequences and will not be in the best interest of my clients
and the communities that we serve. My hope is that the CFPB
will not go beyond the statutory requirements intended for this
rule. They should not add additional data points. They should
exempt smaller banks like mine, reduce the revenue thresholds,
and not breach the privacy of my customers.
I love the community banking industry and I love helping my
customers, and I thank you for convening today's hearing and
the opportunity to offer the community bank perspective. Thank
you.
Chairman MEUSER. Thank you, Mr. Peters.
I now recognize Mr. White for his 5 minute opening remarks.
STATEMENT OF LUCAS WHITE
Mr. WHITE. Chairman Meuser, Ranking Member Landsman, and
Members of the Subcommittee, I am Lucas White, President of The
Fountain Trust Company in Covington, Indiana. I testify today
on behalf of the Independent Community Bankers of America
(ICBA) where I am Chairman-elect. Thank you for this
opportunity.
Community banks are committed to meeting the credit needs
of all small businesses in compliance with fair lending laws.
However, we believe the CFPB's forthcoming rule under Section
1071 of the Dodd-Frank Act will have serious, unintended
consequences. If finalized without significant changes, the
rule will have a chilling effect on customized lending,
compromise borrower privacy in the rural and small-town markets
I serve, and reduce access to credit for certain borrowers.
As described in my written statement, ICBA is urging the
CFPB to stay the effective date until the Supreme Court has
ruled on the constitutionality of the agency.
Is this rule ``the end of relationship banking,'' as the
hearing title suggests? I absolutely believe that it puts
relationship banking at risk and should be amended by the
Bureau or by Congress at the earliest opportunity. Relationship
banking is the key value proposition that community banks like
mine offer.
Relationship banking is our competitive advantage against
the larger financial institutions and nonbank lenders.
The Fountain Trust Company has served markets in West
Central Indiana since 1903 with small business, agricultural,
and consumer lending. Relationship banking is the foundation of
our success. It explains our resilience through numerous
economic and agricultural crises.
When it comes to serving small business, we form
partnerships that go well beyond lending. Community banks
provide practical, real world business counseling that is
especially important to small businesses. Customized lending is
key to these relationships.
Small business lending is not and should not be a
commodity. Underwriting is based on numerous borrower
characteristics and market variables. Loans are typically
customized to suit borrowers' needs and preferences and give
them the best chance of success. The data collected under 1071
will not reflect the full scope of underwriting and may suggest
discrimination where none exists.
Fortunately, our examiners are best positioned to make this
judgment and application of fair lending laws.
Section 1071 is simply the wrong tool for the job. Lenders
will respond by standardizing loan features to protect
themselves from charges of discrimination. As a result, small
business customers will not have access to credit that is
customized to their needs. Importantly, minority and women
borrowers whom this rule is supposed to help often benefit from
customized lending.
This was the outcome of the qualified mortgage rule which
was also a provision of the Dodd-Frank Act. It effectively
forced residential mortgages into a box.
As I discuss in my written statement, QM effectively
undermined our mortgage lending. Section 1071 without needed
accommodations threatens to do the same to our small business
lending.
A recent loan will illustrate my point. We worked with a
local farmer who wanted to open a butcher shop, a vertical
integration that made good business sense. We offered him two
customized loan options, a fixed rate and a variable rate. I
personally walked him through the benefits and drawbacks of
each and how future interest rates could affect his loan
payments and cash flows. This personalized customer service is
what community banks do best and what sets us apart from the
competition.
Unfortunately, Section 1071 would make customized multiple
option lending difficult. It is impossible to compare loan data
across customers who have chosen different options and
demonstrate that lending is not discriminatory. Thus, Section
1071 will limit the scope of loan choices available to small
businesses.
On top of that, the publication of my borrower's loan data
under 1071 would surely compromise his financial privacy. He is
the only butcher in town. In the small communities I serve,
businesses are readily identifiable. Loan offers contain
critical business information and reflect the business owner's
personal financial position as a guarantor of the loan.
I discuss additional objections to 1071 in my written
statement, but the effect on customization and the compromise
of borrower privacy are our primary concerns. The rule could be
greatly improved by recommendations described in my written
testimony that would exempt more banks and borrowers from the
rule. ICBA thanks the Members of this Subcommittee and
Committee who have introduced legislation to make the rule more
workable.
Thank you again for the opportunity to testify. I look
forward to your questions.
Chairman MEUSER. Thank you, Mr. White.
I now recognize Mr. Wilson for his 5 minute opening
remarks.
STATEMENT OF MICHAEL WILSON
Mr. WILSON. Good morning, Chairman Meuser, Ranking Member
Landsman, and Members of the Subcommittee. My name is Michael
Wilson, and I am testifying today on behalf of the National
Association of Federally Insured Credit Unions (NAFCU). I
currently serve as Chief Experience Officer of Members 1st
Federal Credit Union, headquartered in Enola, Pennsylvania.
While small businesses only make up 4 percent of our total
membership, we are very proud of our work in the community as a
small business lender over the last 20 years in 9 counties
across Central Pennsylvania where relationships mean
everything.
We appreciate the opportunity to participate in this
discussion regarding the 1071 rulemaking process at the CFPB.
Section 1071 requires financial institutions to report data
about small businesses and their owners in order to facilitate
enforcement of fair lending laws. While NAFCU lauds this goal,
there is widespread concern about how the CFPB is proposing to
carry out its authority in this area. We outline our concerns
with the proposed rule in detail in our written statement but
would like to highlight a few of our major points here.
The definition of a covered financial institution.
Establishing a 25 loan threshold for reporting is a lower level
than even well-established home mortgage disclosure act or HMDA
limits. Such a low threshold could drive smaller lenders out of
small business lending all together due to the compliance
costs, a fact that the Bureau acknowledges in the proposed
rule.
The small business definition. While the CFPB has a
proposed $5 million threshold, NAFCU believes it should be
consistent with the SBA's $1 million standard.
Covered credit transactions. NAFCU recommends that the
Bureau establish a de minimis threshold consistent with the
NCUA's $50,000 call report threshold. Congress has excluded
Member business loans under $50,000 from the credit union
business loan cap and the NCUA has recognized this and excluded
such loans from call reports. We believe the CFPB is vastly
underestimating the number of credit unions that would be
impacted by the new burdens of this rule because it used the
call report data that excludes these loans in its analysis but
the Bureau did not account for the de minimis threshold by
proposing its own in the rule. By not recognizing this
distinction, the CFPB threatens to compound the compliance
burdens of this rule for credit unions.
Protected demographic information and visual observation.
Under the proposed rule, an employee could be forced to
determine the ethnicity and race of a small business applicant
via visual observation. NAFCU unequivocally opposes any
requirement that an employee of a credit union make visual
observations concerning the race, gender, or other sensitive
data about a small business owner. Not only is this an
unconscionable idea but it also threatens the integrity of any
Section 1071 data collected.
One-time and ongoing compliance costs. NAFCU is
significantly concerned that the Bureau, as happened with its
HMDA proposal, has materially underestimated the one-time and
ongoing costs credit unions are likely to face under the rule.
Mandatory compliance schedule. The proposed rule's 18-month
mandatory compliance schedule will be aggressive, even for the
largest, most tech-savvy credit unions. The vast majority of
credit unions will be forced to rely on multiple IT vendors to
come into compliance. Past experience with the Bureau's
implementation of HMDA suggests that the Bureau is likely
underestimating the time required for IT venders to adapt their
products to comply with major rulemaking. NAFCU has encouraged
the Bureau to adopt a phased, mandatory compliance schedule
based on loan volumes that begins no sooner than 3 years
following the Bureau's adoption of a final rule. We are
supportive of efforts to address concerns about the compliance
deadline, such as the Small Lender Act offered by
Representative French Hill.
In conclusion, with the final Section 1071 rule set to be
released, NAFCU urges the CFPB to exercise its discretionary
authority to exempt smaller institutions from this rule as the
compliance costs outweigh any benefit. If such an exemption is
not granted under the CFPB Section 1022 authority, we would
hope to see significant changes to the proposed rule as
outlined above. Even though small businesses make up a small
percentage of our membership, the cost associated with
complying would have a negative impact on our Members and their
access to credit. Should the bureau not address our concerns,
we urge Congress to step in with your oversight authority and
to consider statutory changes such as enacting the small lender
act. Failure to do so will 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.
I thank you for the opportunity to testify today and look
forward to answering your questions. Thank you.
Chairman MEUSER. Thank you for your compelling testimony,
Mr. Wilson.
I now recognize Ms. Urrutia for her 5 minute opening
remarks.
STATEMENT OF LUZ URRUTIA
Ms. URRUTIA. Good morning, Chairman Meuser, Ranking Member
Landsman, and Members of the Committee. Thank you for the
opportunity to testify and discuss CFPB Section 1071.
My name is Luz Urrutia and I am the CEO of Accion
Opportunity Fund, the leading CDFI nonprofit providing access
to loans, business advising, and networks to underinvested
entrepreneurs.
I spent my entire career in for-profit financial services
which included nearly two decades at Wachovia, then as co-
founder and CEO of a community bank and a CEO of a payday
lending company where I helped to ensure that they provide
responsible financial services to their customers. I joined AOF
as its CEO because of my experience as a lifelong for-profit
banker and my passion for providing responsible financial
services to underinvested communities. I know for a fact that
business and lenders can generate profit and do the right thing
investing in all communities.
As CEO, I am very proud of the impactful work AOF has done
to provide capital to entrepreneurs that are often left behind
by our financial mainstream system. Today, we have deployed
over $700 million to more than 25,000 entrepreneurs, and 80
percent of our borrowers are people of color, women, and
immigrants. In fact, women make up one out of every three
clients we serve. It is because of the entrepreneurs we serve
that I have advocated for rules like 1071 which will allow our
entire financial services system to fully see and better serve
all of our entrepreneurs.
And this transparency is not just about fairness. It is
also about strengthening the economy. A recent study shows that
minority- and women-owned small businesses employ nearly 20
million people and generate over $2 trillion in economic
activity.
I know this to be true, personally and as the CEO of AOF,
because I think about clients such as Reign Free from Oakland,
who started and scaled her catering business after repeatedly
being told that she did not qualify for a loan. We were her
first lender to say yes. I also think about Alicia Villanueva
from Hayward, who took $5,000, bought her first van, and now
she has the most burgeoning tamale business nationwide.
I am proud that we provide loans to everyone--Black, White,
Latino, Asian, and low-income, but I am especially proud of our
investment in Black and Latina women who are starting up more
businesses in this country than any other group. I am proud
that AOF supports these entrepreneurs and the businesses that
they found, the employees they hire and train, and the economic
activity they generate.
However, for decades, entrepreneurs like these women have
not been seen by our financial system. While I am on here to
defend or promote every letter of Section 1071, I recognize
that this rule will accomplish three important things: It will
help small business lenders. It will help entrepreneurs that
desperately need access to capital, and help policymakers that
want to invest in our economy without creating new direct
entitlement programs.
First, this rule would help the market to better address
both the lack of access to affordable capital, and the rise of
irresponsible lending. For the first time, everyone in
financial services would be able to see which business models
are successful at reaching minority-owned, women-owned, and
other small businesses. This transparency would attract
investment capital and partnerships into models that really
work. We can have a market-based model and pro-innovation
approach to regulation, one that will actually help lenders
expand customer acquisition, something that all community banks
and lenders really want and need to do. But we need clarity on
who the businesses are, who is serving them, and what capital
are they getting, because we cannot manage what we do not
measure.
Second, as lenders, the better we understand these
businesses, it will help tailor products and services to meet
their needs. The more knowledge we gain about our markets, our
customers, and their needs, the better equipped we are to
building long-term profitable relationships.
Finally, this rule helps spur additional investments in
small businesses, which is the best way to reduce inequities
without having to create new government programs. Instead, it
will allow all of us to do what our organizations have
successfully done for years--expand access to capital for
underserved entrepreneurs by leveraging existing public and
private sector partnerships.
For these reasons, I am very pleased to testify on how we
can ensure that Section 1071 accomplishes its goals of spurring
additional investment in all our entrepreneurs.
I will conclude by saying that access to capital for small
businesses is a bipartisan priority. There are Mom and Pop
stores in communities that are rural and urban; red and blue;
Black and White, Hispanic, and Asian, and they are all powering
our economy. But we cannot do that without Section 1071 to
shine light on these small businesses' credit applications.
Because as I said before, we cannot manage what we do not
measure, and sunlight is the best disinfectant. As we implement
this rule well, we will finally will be able to increase access
to capital for small businesses and create a more transparent,
bipartisan, and successful financial system.
Thank you, and I look forward to your questions.
Chairman MEUSER. Thank you, Ms. Urrutia, I appreciate that.
We will now move to the Member questions under the 5-minute
rule. And I recognize myself for 5 minutes.
Mr. White, I will start with you. And really, to all of our
witnesses. The CFPB's mission statement is as follows. I am
going to summarize.
We aim to make consumer financial markets work for
consumers, responsible providers, and the economy as a whole.
We protect consumers from unfair, deceptive, or abusive
practices and take action against companies that break the law.
We arm people with the information, steps, and tools that they
need to make smart financial decisions.
Mr. White, do you think that this rule will help the CFPB
to accomplish this mission?
Mr. WHITE. Mr. Chairman, thank you.
I do not believe this rule will help CFPB achieve its
mission. The first part of the mission statement was something
along the line of having markets help consumers. And I would
reference the QM rule that came into effect as part of Dodd-
Frank. As I said in my testimony, customized lending is
absolutely key to small business lending. We had that type of
lending with consumer mortgages prior to the QM rule. As a
result of the QM rule, we now have all of our consumer
mortgages in a matrix. We had a customer prior to QM. Her name
is Mae. She owns a local Chinese restaurant. We had a consumer
mortgage with her. After QM, we could not verify enough income
and we had to turn her down when she wanted to buy a new house.
And so that is an example of where a rule like this can
undermine what the CFPB's mission is.
Chairman MEUSER. Sure. So, will the CFPB's 1071 reporting
rule in any way improve your lending practices and make them
fair? Will you have more businesses in some way because this
rule is in effect? And I will also ask, and I am going to ask
Mr. Peters this and as well Mr. Wilson, is it fair to compare a
mortgage loan to a business loan?
Go ahead, Mr. White. You go first.
Mr. WHITE. they are completely different. Each business is
different. Their cash flows are different. Their needs are
different. And that is the reason we tailor our loan products
specifically to what that customer needs. And so you cannot
compare consumer lending at all to small business lending in my
eyes.
Chairman MEUSER. Mr. Peters?
Mr. PETERS. Yeah, I would agree. They are two different
situations. I mean, small businesses are unique. They are at
different stages in their lifecycle. Oftentimes you are
counting on pro forma income or projections, whereas in
consumer lending it is documented past. So I think it is two
different types of lending.
Chairman MEUSER. And continuing, Mr. Peters, will this have
any effect in extending relationships with small businesses in
your community? I mean, let's face it. We are talking about
expanding lending here, not what occurred with the PPP where
fraud came into play. Now, we all know that knowing the
customer within the PPP reduced potentiality of fraud
immensely; right? I mean, it did not happen with knowing the
customer. But would this help you accentuate and enhance your
business base in any way in your view and change your proactive
practices to outreach to your community?
Mr. PETERS. I do not believe so. I think we are only as
strong as our communities as a community bank. And we want to
build stronger communities. So, I do not think that it would
help that or change the outlook at all.
Chairman MEUSER. Well, it is certainly your reputation.
Mr. Wilson, let me ask you, can you explain how your
employees are going to feel about having to potentially guess
the racial information of customers based upon appearance,
surname, when it is not self-reported by the small business
which is their right and as this rule would require?
Mr. WILSON. I would imagine that would put our associates
in a very uncomfortable situation. I think about the 19- or 20-
year-old teller who is in their entry-level role and being, you
know, put in a very awkward situation like that would be very
difficult for them. In addition to that, it could really
compromise the data which could undermine exactly what the
attempt is here to help.
Chairman MEUSER. All right. Thanks.
And I am going to go back to you, Mr. Peters. Would this
rule require you to increase employees, increase your costs for
compliance, add additional burdens to your ability to be a
thriving lender in your community?
Mr. PETERS. Yes, it would. I mean, you are talking about
systems and when systems are put into place what a lot of
people do not think about is there needs to be somebody to run
that system. The care and feeding of it, in addition to
compliance, to the checking, the double checking, the software,
to gather and report it. I would say something like this would
touch at least 15 different people in our bank and probably add
in the neighborhood of $500 to $800 per loan in the startup
year.
Chairman MEUSER. Thank you. My time has expired. Thank you
for your testimony.
I now recognize the Ranking Member for 5 minutes for
questions.
Mr. LANDSMAN. Thank you, Chairman.
So I appreciate everyone being here. The fact that we have
a community bank and a credit union, a CDFI, part of this
hearing is to better understand what is a proposed rule. Right?
You know, the rule is still being finalized, input is being
gathered, information from everybody is collected. And so it
will be important for us to, I think, wait to see what this
proposed rule is, though it does seem to me that this is a very
straightforward thing. And Mr. Wilson touched on this which is
although it may have been Ms. Urrutia, sorry, who said it but
this is about collecting data and trying to better understand
who does this best. And not an entitlement program which is I
think a really important thing to keep in mind. And you know,
to do it in a way that does not overburden folks obviously is
important and clearly the testimony today suggests that, you
know, for some of our banks it does. I will just way of
background and then I will ask my question, I represent a
district with a large number of smaller businesses, women-owned
businesses, Black-owned businesses. We have a lot of childcare
providers, most of whom are run by Black women, owned by Black
women. And their ability to access capital has been tough. And
you know, post-pandemic it has been even tougher because of the
cost of capital; right? So accessing affordable capital. And so
it does seem to me very straightforwardly that, you know, the
more data that we are able to collect, the better it is that we
will be able to understand what is working and what is not. And
I think the question is how you do that in a way that is not
overly burdensome and does not lead to this situation where
folks are being left out or you cannot provide loans.
So I guess my question first Ms. Urrutia, sorry, I am
struggling with that one, is do you believe that this will
undermine, you know, small banks, their ability to provide
these loans?
Ms. URRUTIA. I think it would be the opposite. I think
that, this rule is going to lead actually to more small
business lenders wanting to get into the market because
everyone is going to become more aware, more knowledgeable, and
more informed about the scope and scale of small businesses and
the impact that they have on our economy. And frankly, how much
they are growing and how profitable they are for institutions
that want to serve them responsibly. You know, we saw this
development with HMDA. It did not pull lenders away. In fact,
as more data was reported, more competition emerged, better
products were developed, and everybody won, the consumer and
the lenders.
The CFPB issued a lender survey and developed cost
estimates that were then reviewed by lenders, and many smaller
financial institutions were asked this question during the
rulemaking process and responded to say that it would not force
them out of the market. The Bureau also estimated the cost per
application would range anywhere between $7 for the larger
banks with more technological capabilities to $28 for the
smaller banks. And so, you know, for the first time I think
everyone in financial services would really have access to see
what the market is made up of and to be able to reach
successfully more minority-owned, women-owned, and other small
businesses. And I think once again, the transparency is going
to attract quality responsible business models to want to serve
a very burgeoning, growing, and profitable market which is the
small business lending community.
Mr. LANDSMAN. You have been able to do a lot and this has
helped you better understand the impact. What is your
recommendation or suggestion, advice in terms of managing the
data collection and pursing the intent of the rule which is to
increase lending to folks that have struggled to get lending,
to get the capital?
Ms. URRUTIA. Yeah. So just, our own perspective, last year
we did about 3,000 loans to small business entrepreneurs. That
is an enormous amount of lending. And you know, like every
other CDFI, we are required to collect and report data on a
variety of data points--interest rates, fees, origination cost,
race, gender, ethnicity. And CDFIs do that.
Mr. LANDSMAN. I have run out of time and I apologize. I
spoke a lot. But as the hearing continues I think just getting
that sense as to what advice, recommendations would be great.
Thank you, Mr. Chair.
Chairman MEUSER. Thank you. The Ranking Member's time has
expired.
The Chair now recognizes Mr. Luetkemeyer from Missouri for
5 minutes.
Mr. LEUTKEMEYER. Thank you, Mr. Chairman.
Mr. White, when Congress passed Dodd-Frank 12 years ago it
included Section 1071, which requires companies to inquire
whether customers are a small business, woman-owned business,
or minority-owned business at the credit application stage.
However, in the 1970s, Congress passed the Equal Credit
Opportunity Act which prohibits race as part of lending
criteria. If the CFPB's proposed rulemaking would make
financial institutions essentially guess the applicant's
ethnicity if an applicant does not want to provide such
information it would appear to me that would be racial
profiling if I am not mistaken.
Mr. Wilson, does that proposed rule go against the Equal
Credit Opportunity Act which has been in law since the 1970s?
Mr. White, I am sorry.
Mr. WHITE. As Mr. Wilson actually said earlier, we are
concerned with having to guess the race of our customers. We
have to do that under HMDA currently but through PPP we learned
that a substantially higher number of small businesses declined
to provide that information than homeowners. And so as a result
of that, our employees are going to be guessing that
information a lot more than what they do under HMDA. And that
will eventually kind of erode the data. As we say in the
banking industry, ``garbage in, garbage out.'' With models, it
will be very hard to analyze the data.
Mr. LEUTKEMEYER. Okay. The Equal Credit Opportunity Act is
a law though, is it not?
Mr. WHITE. Yes. We cannot discriminate, period.
Mr. LEUTKEMEYER. This is a rule by the CFPB; right?
Mr. WHITE. Yes.
Mr. LEUTKEMEYER. Does a law overrule a rule?
Mr. WHITE. No.
Mr. LEUTKEMEYER. No?
Mr. WHITE. The statute rules.
Mr. LEUTKEMEYER. They are equal in substance? Equal in
importance? One does not overrule the other?
Mr. WHITE. Statute technically I think overrides a rule but
we have to follow both. And as long as they do not conflict----
Mr. LEUTKEMEYER. Well, does this not conflict here because
you are basically racially profiling with the way the new rule
is proposed versus the Equal Credit Opportunity Act that says
you cannot do that?
Mr. WHITE. It certainly opens up the risk to that.
Mr. LEUTKEMEYER. So, okay, as an attorney, would you not be
concerned by your officers opening yourself up to a lawsuit in
this situation? If you comply with one rule here, are you
against, are you doing something in contradiction to the law?
Mr. WHITE. It certainly increases our risk of opening
ourselves up to litigation. That is correct.
Mr. LEUTKEMEYER. How would you advise your customers, your
clients in this situation? If you were a bank attorney--not the
CEO now. If you are a bank attorney for a group of banks, what
would you advise them to do here?
Mr. WHITE. When the rule requires our employees to guess,
there is not much more we can do than say give it your best
guess.
Mr. LEUTKEMEYER. So as long as you are guessing according
to what the rule tells you to do you are going to be okay?
Mr. WHITE. Well, hopefully. I will say as a community bank
we know our customers.
Mr. LEUTKEMEYER. Is that away to do business, Mr. White?
Mr. WHITE. No, it is not.
Mr. LEUTKEMEYER. To guess what is going to happen?
Mr. WHITE. We do not prefer to guess when it comes to doing
business.
Mr. LEUTKEMEYER. Okay. Thank you for that.
Mr. Peters, you made a statement a minute ago that each
bank has to collect the data and report it even if you do not
make the loan. It would seem to me that is going to skew your
data if you are going to have to continue to report it.
Somebody who is not a worthwhile individual, he goes to seven
different institutions and gets turned down, that is going to
skew the data, is it not?
Mr. PETERS. Yeah. I think definitely so. You know, most
times a small business is not going to just go to the first
lender. They are going to shop their deal and try to talk to a
number of banks about it. The banks are also going to help them
put together the structure of that loan. So it may look
different in different applications in different spots and only
one bank will fund the loan but they will all be reporting the
data and I think it would be very difficult to find meaning in
that kind of data.
Mr. LEUTKEMEYER. Mr. White, CFPB wants to collect a series
of personal and detailed data from small businesses but refuses
to release which information they will publicize or share how
they plan to make that determination. My bill, the Business
Loan Privacy Act will require the CFPB to do a separate notice
and comment rulemaking to determine what information will be
published by the Bureau.
Mr. White, do you believe the CFPB should have a separate
rulemaking for this, allowing small businesses and lenders to
be part of the conversation?
Mr. WHITE. Absolutely. And on behalf of ICBA, I would like
to thank you for that legislation that you have introduced.
Small businesses and community banks should have a voice in
what data is made public because that is where our privacy
concerns come up for our customers.
Mr. LEUTKEMEYER. Well, it looks to me like your clients',
your customers' information is going to be much more public
than what it is now if this goes through. Do you have concerns
about that information being made public and having some
ramifications of that to your customers?
Mr. WHITE. We do. Small businesses prefer their information
to remain confidential. And when our customers realize that
their data is being made public it provides an incentive to go
to a larger bank where their information can basically be
hidden in the data. And if they come to our bank like that
butcher I talked about, everybody is going to know who it is
but if he goes to a big bank he may not.
Mr. LEUTKEMEYER. So what you are saying is instead of being
able to do business with your local community bank, if you
prefer not to have everybody in the community know what you are
doing and what your business is you may go down the road to
some bigger bank or some other community and as a result you
are not doing business with your own community bank any longer.
Mr. WHITE. That is exactly right.
Mr. LEUTKEMEYER. And so it will hurt the community banks by
doing this.
Mr. WHITE. Highly likely. Yes.
Mr. LEUTKEMEYER. Okay. Thank you very much for your
testimony today. Mr. Chairman, I yield back.
Chairman MEUSER. The gentleman yields.
The Chair now recognizes the Ranking Member of the Full
Committee, Ms. Velazquez from New York for 5 minutes.
Ms. VELAZQUEZ. Thank you very much. And thank you to all
the panelists for your insightful information.
Ms. Urrutia, you said, you stated that we cannot fix what
we cannot measure. And so when we were going through the
pandemic and we issued the first tranche of money to provide
relief to small businesses, anecdotal data was telling us that
the smallest of the small businesses and Black and Latino and
Asian businesses were left behind no matter how hard they try.
Do you know why? Because the banks did not proactively help
anyone but their customers. So I requested when I was consulted
by the leader in the House to sign onto another tranche of
money I said, no, I want to see the data. I want to see if
everyone, every small business that is in need of help has been
provided by the banks. And the Secretary of the Treasury
Mnuchin refused. And then when he saw that definitely we will
not be part of providing more relief unless we saw the data,
what the data told us was exactly what the anecdotal data was
telling us, anecdotal stories was telling us. And so, we added
money for nation lenders to be able to provide relief to small
businesses.
Ms. Urrutia, you were a Member of the CFPB and the notice
of the proposed rulemaking provides that the applicants
themselves do not have to provide their information. But, if
the applicants do not provide the information, the financial
institution must provide it based on visual observation or
surname. In fact, those SBREFA panels were conducted by former
Director Kraninger, who was appointed by President Trump. Is
that not correct, Ms. Urrutia? And so it is also fair to say
that the CFPB under both the Trump and the Biden administration
thought that crafting and finalizing this rule was necessary to
protect small businesses.
Ms. Urrutia, can you explain why the data collection
requirements being proposed by the CFPB are not overly
burdensome on small depository and non-depository institutions?
Ms. URRUTIA. Yeah. So as I explained earlier, you know, my
previous experience as a banker and my current experience as
the CEO of the largest nonprofit CDFI, I do not believe that
the data collection being proposed under 1071 is overly
burdensome. As I was stating earlier, we do on average 3,000
loans, small business loans a year. And like every other CDFI,
we are required to collect and report comparable data to
Section 1071 on small businesses on an annual basis and report
that data to the CDFI fund. Many of the CDFIs that report with
us are also small, community-based organizations and the
information reported includes transaction-level data, such as
interest rate, origination fee, points, terms, amounts,
payments, race, ethnicity, age, and gender.
Ms. VELAZQUEZ. Thank you for that answer.
Can you expand on why you believe the work done by the CFPB
is necessary to small businesses as consumer?
Ms. URRUTIA. Well, if you look at the small businesses, you
know, they are often called Mom and Pop businesses. And that is
because they are small and they are run by the same consumers
that the CFPB is trying to protect. These businesses do not
have CPAs or CFOs making financial decisions for the family-run
businesses and they have the same level of sophistication as
the average American household. And these Mom and Pop stores
are in rural and urban communities and are powering our
economy. And their success is our success but they need capital
to grow. And unfortunately----
Ms. VELAZQUEZ. But are you not concerned about the
potential upfront or ongoing compliance costs?
Ms. URRUTIA. I can tell you that our compliance cost up
front was $35,000 and annually it is $10,000, regardless of
number of loans that we are doing. And so I think that the
costs are manageable compared to the benefits of having access
to data that is going to help all of us better serve small
businesses in America.
Ms. VELAZQUEZ. Thank you. I yield back.
Mr. LALOTA. Thank you.
The Chair recognizes himself for 5 minutes.
I am Nick LaLota. I represent a Long Island district, the
1st District of New York. We are about a couple hours east of
Manhattan. We are a suburban district with many Mom and Pop
businesses. They are struggling under the high inflation, high
interest rates, excessive regulations, and labor shortages just
to name a few. Members of this Committee from both sides of the
aisle agree that these challenges are real and persistent
throughout the country. And with that in mind, it is troubling
to me and other Members on the Committee that the Consumer
Financial Protection Bureau is using resources at its disposal
to create rules to add to these very real pressures instead of
mitigating them. Hopefully at a future hearing we can have a
representative from the CFPB to explain to us the timeliness of
this rule. Thankfully, you, as today's witnesses, have beyond a
doubt demonstrated that these new regulations would have
duplicative measures and would cost millions per year to comply
with and would irreparably harm our relationship banking.
My first question is to you, Mr. White. Sir, thank you so
much for being here.
As you stated in your testimony, you have 130 employees
across many locations. How difficult would it be for your
business to create a firewall as has been described today?
Mr. WHITE. Any time when you have a bank our size with our
number of employees, any new regulation is hard to figure out
how are we going to do this with the employees we have. And I
will explain what we do on HMDA because it is fairly similar to
what will happen with 1071. Our loan processor enters the data.
We then have three separate people review that data before we
file it or report it. And we still have the random mistake
after three levels of review. And so when you consider last
year we did approximately 770 loans that would be subject to
1071, you are looking at HMDA on steroids basically in terms of
the amount of manpower and time that it would take.
Mr. LALOTA. Thank you. And following up on that, you also
illustrated problems with the scope of the data collection. For
example, the 25 loan threshold is far too low and the borrower
gross annual revenue threshold is too high, meaning the data
collection requirements would apply to a majority of community
banks. In your opinion, what should the threshold be?
Mr. WHITE. ICBA is advocating for a $1 billion asset
threshold. Banks below $1 billion would be exempt. If the CFPB
or the government stays with a number of loans we would support
French Hill's bill which has a 500 loan limit. Twenty-five
loans a year is so low it is honestly a little bit offensive
that that is considered an exemption.
Mr. LALOTA. Thank you so much.
And Mr. Peters, in your testimony you talked about the
decline of community banks and the resulting consolidation. And
I share these concerns, sir. How do you think small businesses
like the ones in my district on Long Island and throughout the
country will fare if there are fewer choices when it comes to
lenders?
Mr. PETERS. Well, I think we have the best financial system
in the world, and I think part of that is having choices as
businesses and consumers in competition. And I think in this
case if you are concerned about the privacy of the data you may
want to go to a larger lender where your data could be harder
to find by the public. If I was denied the loan, I do not want
my community to know that so I think it does not play in favor
of our small business clients and communities.
Mr. LALOTA. Thank you, Mr. Peters. And following up with
that, you discussed that making application loan data public
will be opposed by your clients for a variety of legitimate
reasons. Do you think that this will make your clients less
likely to apply for those loans?
Mr. PETERS. I think in some cases it could push them to
other lenders that will not follow those rules such as I
mentioned in my testimony with hard money lenders that fall
under these thresholds and can ensure privacy of data. And that
is something that is very important to my clients.
Mr. LALOTA. Thank you. And thank you for all the witnesses
being here. I yield back the balance of my time.
I now recognize Ms. Chu from California for 5 minutes.
Ms. CHU. Thank you.
Ms. Urrutia, we know that women- and minority-owned small
businesses still face significant barriers in access to
capital. These gaps were particularly clear during the Paycheck
Protection Program and the initial PPP application did not ask
for demographic information. And so there were shocking
results. In fact, because the SBA was not gathering this data,
investigators at the LA Times in my area published a report in
2021 and they have to use census track data in order to look at
majority ethnic census tracks. And they determined that
businesses in majority White neighborhoods received loans at
twice the rate that majority Latino census tracks received the
loans, 1.5 times the rate of businesses in majority Black
areas, and 1.2 times the rate in Asian areas. And so we clearly
need it, that data transparency. What happened with PPP shows
us why we have to have this information. And as a result, we
did this $60 billion set aside for the mission-based lenders to
provide loans to those in minority and women-owned areas. And
this problem was ameliorated tremendously and now the loans
were shown to be given to those in those underserved areas.
So Ms. Urrutia, can you speak to the lessons of the PPP and
why the data transparency like this required by Section 1071 is
needed to both understand and address discrimination and
disparities in small business lending?
Ms. URRUTIA. Sure. I can share my own personal experience
about discrimination in the financial system. When I started
working for a bank, I was turned down because I did not have
credit. And so the fact that I was an immigrant and I had
limited credit history made me invisible and unbankable. Fast
forward 18 years, that experience led me to find a community
bank and then I wanted to raise capital. And I kept on hearing
no, no, no at every turn of the way until I show up with a
couple of male board Members and then the capital to form the
bank started flowing. Twenty-one years later things have not
changed. Two percent of venture capital goes to women. Four
percent of commercial loans goes to women. In the meantime, it
is women that today are building small businesses at a higher
rate than any other demographic in this country. So the
problems persist, and unless we put sunshine in this problem we
are never going to solve the problem that women and communities
of color face accessing capital from financial institutions.
Ms. CHU. Thank you for that.
And Ms. Urrutia, well, for one thing we do know that the
CFPB Home Mortgage Disclosure Act rule has been in place for
more than 40 years and has been instrumental in giving the CFPB
the data they need to identify and root out discriminatory
lending practices. And even more importantly, mortgage lending
activity has not decreased or been otherwise negatively
impacted due to compliance costs.
Now, there was some discussion earlier about, well,
mortgage loans are different from business loans and so that is
why with business loans you should not look at demographic
data. How do you answer that?
Ms. URRUTIA. You know, I think this can be very much
compared to HMDA. There was anecdotal evidence that underbanked
populations were not being served and that capital flows were
falling short when reaching certain communities. But without
the data there was no proof and HMDA was that data. The result
really was real access to capital for those communities, and
really great benefits were achieved for both the individuals
and the institutions that were providing the capital. As a
result, lenders got into mortgage lending because they thought
it was profitable, it was growing, and they could really do
great work. There is plenty of evidence following the HMDA data
expansion between 1993 and 1999, the number of home purchases
made. For Latino consumers, it increased over 120 percent. For
Native Americans, 119 percent. For African Americans, by 91
percent. And plenty of more statistics that show that increase
in the flow of capital happened to underserved communities.
There were certainly other factors that contributed to this but
HMDA was a key part of that expansion. So it has been done
before.
Now, we do have some recommendations. Having a national
database, and one thing I want to focus is on privacy. If you
look at 40 years of HMDA's existence, not a single home loan
has been identified. And the CFPB also contends that the
publication of HMDA, which has similar data points to Section
1071, has not resulted in any measurable increase in fraud or
identity theft.
Ms. CHU. Thank you.
Mr. LALOTA. The gentlelady's time has expired.
I now recognize the gentlelady from Texas, Ms. Van Duyne,
for 5 minutes.
Ms. VAN DUYNE. Thank you very much, Mr. Chairman. thank you
for holding this important hearing on a very concerning rule
coming from the Biden administration which once again will
hamper growth and create additional regulatory burden in an
already difficult environment.
As we have already talked about in this hearing multiple
times, the inflationary environment created by this
administration has led to the rise of interest rates, which has
limited the access to capital for small businesses. This rule
is confusing to interpret, and it will be confusing to
implement, which will lead to higher compliance costs from what
we have understood today and will once again be passed along to
small business owners further increasing the cost of capital.
We have heard a couple of strange statements today.
Mr. Peters, I am going to ask you, do you have any clients
who you have given loans to that are women?
Mr. PETERS. Absolutely. Quite a few.
Ms. VAN DUYNE. Do you have any minority clients?
Mr. PETERS. I do.
Ms. VAN DUYNE. Mr. White, do you have female and minority
clients that you have actually given loans to as well?
Mr. PETERS. Yes. Absolutely.
Ms. VAN DUYNE. I am going to ask you, Mr. Wilson?
Mr. WILSON. Absolutely. In fact, we were the ninth largest
provider of small dollar PPP loans in the credit union space in
the country.
Ms. VAN DUYNE. That included women and minorities?
Mr. WILSON. Absolutely.
Ms. VAN DUYNE. And then I am going to ask you as well, you
have women and minority clients as well?
Ms. URRUTIA. Absolutely.
Ms. VAN DUYNE. Mr. Peters, does every small business who
applies for a loan qualify?
Mr. PETERS. No.
Ms. VAN DUYNE. Why?
Mr. PETERS. We are relationship lenders so we are not just
looking at a scorecard or a matrix. You know, the foundation of
relationship lending is the five Cs of credit. We are looking
at character. We are looking at capacity, collateral, capital,
and conditions. You need to find the story behind the applicant
and you cannot do that with a check box.
Ms. VAN DUYNE. Okay. I am going to ask you, Mr. White, the
same question.
Mr. WHITE. I agree with Mr. Peters. One thing I will add is
that I mentioned the relationship banking and counseling our
business customers and giving them real-world business advice
is part of what a community bank does. When we have small
business owners that do not qualify for one reason or another
we work with them to show them what they need to do to qualify
in the future, whether that is improve their cash flow, improve
their collateral or whatever it may be, we work with our
customers to get them to a point where they can qualify.
Ms. VAN DUYNE. Mr. Wilson, does every single small
business, even if they need the capital that comes to your
bank, are they able to qualify?
Mr. WILSON. Well, in addition to following a similar
process to Mr. Peters and Mr. White, we also take it a step
further and assign every small business their own personal
concierge. So even if they cannot qualify, we would provide
them with a continuum of services, and even individuals who may
be able to help them down the road.
Ms. VAN DUYNE. Are you required to do that by law?
Mr. WILSON. Absolutely not.
Ms. VAN DUYNE. So why do you do it?
Mr. WILSON. Because it is the right thing to do in our
communities that we serve.
Ms. VAN DUYNE. Thank you.
Mr. Peters, you had mentioned that per cost of loans if
this regulation were to go through, it would possibly increase
between $500 and $800 per loan. Can you define what you think
would be adding to that increase?
Mr. PETERS. Well, there is a number of systems costs. One,
banks are relying on their core vendor. So there would have to
be that integration to the core. There would have to be
additional software to capture and report the data. There would
be somebody that runs that system. There would be audit of that
system. There would be compliance. There would be training the
lenders on how to tactfully try to gather that information
accurately. So it is going to affect at least 15 people and a
number of systems. And as my IT group continually reminds me,
systems do not run on their own.
Ms. VAN DUYNE. So is your company, is your bank going to
just go ahead and take those costs or will those be reflected
in the costs that you charge your small businesses?
Mr. PETERS. I think it would have to be reflected into the
rate and fees that are charged to the small businesses.
Ms. VAN DUYNE. And Mr. White, I am going to ask you the
same question. Do you see that happening?
Mr. WHITE. Yes, I do. When the examiners come in and
examine us, one of the things they look at are our earnings.
And so banks have to be profitable to get good ratings. If we
do not make money at some point we will go out of existence.
And so at some point as the regulations get added onto and
added onto, those costs do have to be passed on to the
customers.
Ms. VAN DUYNE. Thank you.
And Mr. Wilson, do you think that this additional
regulation will make loans cheaper for your small businesses or
do you think it is going to make it more expensive?
Mr. WILSON. It would certainly be an adverse impact. We
have 60 branches in the communities that we serve so think of
that as 60 individuals that then have to be completely
retrained. All of those systems that go into place, much like
Mr. Peters was saying, the domino effect of all of these things
is extensive. Just by comparison, we have been working on CECL
for nearly 5 years so it is no small undertaking. It is not
like simply flipping a switch and wallah, there is the data.
Ms. VAN DUYNE. Thank you. I really appreciate all of your
input today and I think it is pretty clear that this additional
regulation is bad for small businesses, will increase the
costs, and it takes the personal touch that you offer all of
your small businesses. So thank you for your testimony here
today and I yield back.
Mr. LALOTA. Thank you.
The Chair now recognizes the gentleman from Missouri, Mr.
Alford, for 5 minutes.
Mr. ALFORD. Thank you, Mr. Chairman and Ranking Member for
holding this important hearing. And thank you to our witnesses
for being here today.
Small businesses are supported by community banks and
credit unions for their day-to-day business needs. And we have
seen a lot on the news lately about our financial system. But
what we really do not see in the news cycle and the headlines
is how strong our community banks are and our credit unions and
how they are still a fortress for our communities.
Since the onset of the bank collapses earlier this month,
my team and I have been in touch with a lot of community
bankers and credit unions around the district and around the
state. Since day one, it has been crystal clear to me that our
financial institutions and Missouri stand ready to serve
customers' needs just as they have been doing for decades. What
they truly do is relationship banking. And I want to give you a
personal example.
Just today, I have several accounts, one at a very large
national bank that you would recognize the name, and several
community banks. And I have a mortgage with a community bank
and I did not have enough money in my checking account to cover
the mortgage payment due today. My banker, who I had a
relationship with before I even thought about running for
office texted me this morning and said, hey, Mark, we need to
move some money over from one of your accounts to cover your
mortgage. Large banks will not do that, folks. Large banks will
not do this. It is this Committee's job to allow small
businesses to thrive. To do that we have to make sure that
community banks and credit unions that serve small businesses
and individuals are not overburdened by needless regulation
from the unconstitutional Consumer Protection Bureau simply to
appease the Biden's far left agenda.
So I want to get in with my question with you, Mr. Peters,
Mr. White, and Mr. Wilson. Community banks and credit unions do
not have large legal and compliance departments.
Mr. Peters, will the 1071 rule put you at a competitive
disadvantage compared to institutions that have larger
departments to handle such needs?
Mr. PETERS. Certainly, it would be a heavier lift for us.
We do not have the robust systems or the program capabilities
internally to build this, report this data as a much larger
organization would have.
Mr. ALFORD. Mr. White?
Mr. WHITE. We do not have thousands of employees like the
mega banks. We do not have dozens or hundreds of people in our
compliance department. Up until just 8 or 10 years ago it was
actually the Dodd-Frank Act that required my bank to hire a
chief compliance officer. Prior to that, my dad and my brother,
who are also with the bank, they were primarily responsible for
compliance. So we do not have the people or the means to spread
this over.
Mr. ALFORD. Mr. Wilson, I feel you would probably say
pretty much the same thing. You are going to have to pick up
the slack from somewhere else. How is that going to affect your
customers in general?
Mr. WILSON. Sure. Similar to what I said previously, we
would have to make this up in infrastructure, staffing costs,
retraining. These things have to be passed along somewhere.
That is bad for the consumer. And if it makes it too burdensome
for small institutions that means less competition which
ironically is bad for the consumer. So think about that for a
minute.
Mr. ALFORD. Mr. Wilson, my friend from Missouri, Mr.
Luetkemeyer touched on this a little bit earlier. I want to
delve a little bit deeper into it. The rule that calls for the
collection of all sorts of data including race, if race is not
evident, is it true that a teller has to assume or I guess, I
know Mr. Peters you said that they are going to be tactfully
gathering the information. It seems it could be rather
sensitive. How do you go about this, Mr. Wilson?
Mr. WILSON. I mean, the thought of putting our entry level
folks in this situation is extremely uncomfortable. We have
made so much progress socially, you know, and such a focus on
diversity, equity, inclusion, belonging, programming, but to do
something like this would quite frankly set us backwards and it
is not something that we would want to put our entry level
associates in that situation of having to guess whether it is
in person or over the phone, it is just not right. In addition
to that, it could seriously compromise the data if they are
wrong based on assumptions.
Mr. ALFORD. Thank you so much again for being here today.
This is very important and, you know, we do not need more
regulation. We need community banks to support our businesses
and our individuals to make us successful in America.
Thank you, and I yield back.
Mr. LALOTA. The gentleman yields.
The Chair now recognizes the Chairman of the Small Business
Committee, the gentleman from Texas, Mr. Williams for 5
minutes.
Mr. WILLIAMS. Thank you, Chairman. And I want to, in full
disclosure, before I get started, I am a car dealer. That is
what I do. When I am not here I own car dealerships in Texas so
it makes me kind of a halfway banker. And I have seen a lot of
this through a lot of years and we seem to be going back to
where ewe were back in the 1960s, and it is not good. And I
want to thank all of you again, our witnesses for being here
today. And before I ask them more specific questions about this
rule I want to take advantage of having some experts in our
community banking system in this room.
So Mr. Peters, you being an expert, okay, I want to get
your opinion on how small businesses have been adjusting to
this high interest rate environment we now are in, something
that did not have to happen, and the general health of small
businesses looking to access capital.
Mr. PETERS. Well, certainly, the cost of capital, the cost
of loans on a variable rate basis is increasing which puts
strain on cash flow and reduces the ability to expand and to
hire. And I think the sentiment in many areas where I bank and
in the market is that this could lead to recession and that we
had better prepare for that and reduce our spending.
Mr. WILLIAMS. Well, and small businesses, you know,
interest, again, I am a car dealer, interest in my business
tears everything apart from margins to so forth. And when you
have a situation like this you are going to have businesses lay
off people, are you not? They are going to try to cut costs and
people are the highest expense in most businesses. And then the
idea that they can raise prices to cover that cost is
ridiculous because we have got inflation now so we are going to
raise prices. So, this high interest rates we are in is causing
just a lot of problems. I tis going to be hard for small
businesses to recover. We know that. That is why I am a big tax
cutter.
I think everyone in this room shares the objective of
making it easier for viable small businesses to get a loan and
start working towards the American dream. I believe if we want
to make this a reality, imposing a significant new regulatory
cost is not the way to do it. We talked about that. Most of the
time these people we are hiring, they add no value to our
business as far as what they sell. They are an expense. And
these new costs will have to be passed along to consumers.
There is a point that you cannot do that any longer; right? You
just cannot keep passing costs on. And small business loans
will get more expensive. All of you have said that. They are
already now. So instead we should be examining the regulatory
hurdles that are disproportionately harming community banks and
credit unions. And not by imposing an expensive new government
mandate is going to fix it because once you get the mandate it
is hard to back it off.
So Mr. White, can you give this Committee some suggestions
of things we should be examining to make it easier for your
institutions to get money into your community? So what should
we be doing to help you and in the end we help you, you help
your borrower?
Mr. WHITE. In general, I would say let us do what we do
best, which is help our customers. Do not dictate how we have
to do business to help our small businesses. In particular, on
1071, I would say we talked some about the exemption for banks
under $1 billion in assets. We would also encourage the revenue
threshold to be reduced from $5 million to $1 million. That is
still going to cover the vast majority of small businesses in
the country. We would also support a mission-based exemption
for NDIs and CDFIs as well. But fundamentally, community banks,
we know how to help our customers. We have done it for
generations. We are stable and successful at doing that. And we
just need to be allowed to do it.
Mr. WILLIAMS. Yeah. If the government would get out of your
life it would be pretty good, would it not? And maybe we could
insert the customer to tell you if you are doing a good job or
not and let you compete.
Mr. WHITE. As I said earlier in my testimony, we often, to
small business customers and our ag customers, give them an
option, whether it is an ag line of credit, do you want a fixed
rate for a year, do you want a variable rate based off of
prime? We walk them through the differences and we let them
pick and they appreciate that.
Mr. WILLIAMS. I have some time left. Mr. Wilson, do you
want to add to that? What can we do to help you?
Mr. WILSON. Well, our whole philosophy is built around
people helping people. We started 73 years ago when nine people
put money into a pot to lend each other money for appliances
during the war. So we are very good at what we do. We want to
continue to serve our Members. We want to continue to make our
associates happy because then they serve our Members well and
that in turn makes our communities a thriving place. I think it
is critical to mention that it is not 1071 or nothing. There
are already incredibly extensive rules, data collection, things
that are being provided on a quarterly and annual basis. So at
a minimum what NAFCU is asking for is consistency. You have
three different definitions. You have what the NCUA has. You
have what the SBA has. You have what the CFPB has. That makes
it incredibly burdensome for institutions.
Mr. WILLIAMS. My time is up, Mr. Chairman. I yield back.
Mr. LALOTA. I would like to thank all of the witnesses for
participating today, to the Members for their thoughtful
questions.
And without objection, Members have 5 legislative days to
submit additional materials and written questions for the
witnesses to the Chair which will be forwarded to the
witnesses.
If there is no further business, without objection, the
Committee is adjourned.
[Whereupon, at 11:26 a.m., the subcommittee was adjourned.]
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