The CFPB’s data overreach hurts the businesses it claims to help

The Consumer Financial Protection Bureau (CFPB) is on track to use financial institutions as tools to harvest private data from small businesses. This mandate from Dodd-Frank is a major encroachment of the federal government into private business activities. 

Like most provisions of Dodd-Frank, section 1071 imposes unnecessary reporting requirements on financial institutions and risks cutting off credit access to minorities, women and the respective small businesses they own. The mandate in section 1071 sets the stage for the CFPB, the brainchild of left-leaning Sen. Elizabeth Warren (D-Mass.) to insert its authority into every loan agreement between financial institutions and small businesses.   

Signed into law in 2010 as a provision of Dodd-Frank, section 1071 amends the Equal Credit Opportunity Act to facilitate “enforcement of fair lending laws” and enable “communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned and small businesses.”

While lending discrimination is abhorrent, and the goals of this provision are commendable, the methods for preventing this discrimination as outlined in this provision fail to solve the problem.   

The CFPB wants to make business decisions for banks, credit unions and financial technology companies. Section 1071 directs financial institutions to collect data on small businesses that apply for a loan. Specifically, the financial institutions must disclose data to the CFPB, such as the sex, race and ethnicity of the loan applicant, the amount of the credit transaction, the gross annual revenue of the business and the census tract in which the business is located. The statute also requires the CFPB to issue a rulemaking to enforce these mandates and expound upon them.

On Sept. 1, the CFPB released their notice of proposed rulemaking pursuant to the mandate in the statute. Most notably, the rule, if finalized, would establish a government-run database that would house vast amounts of information on small businesses, particularly, minority-owned and women-owned businesses. But astoundingly, the rule would prohibit the financial institutions collecting this data from being able to view it themselves. So, the Biden CFPB trusts the government to steward private information, but it does not trust private financial institutions (which have shareholders to answer to) to view the information they are required to collect. This is illogical. 

Moreover, the CFPB’s rule requests more information on small businesses than is required in statute. In addition to the aforementioned data points, the CFPB is also collecting the six-digit North American Industry Classification System (NAICS) code of each business, the number of workers that the small business has, how long the small business has been operating and the number of principal owners of the small business. 

The CFPB will likely use the data it collects as a precursor to issuing future regulations that will force financial institutions to only lend to certain small businesses without considering risk factors. If financial institutions are unable to take risks into account when deciding whether to extend credit, they will likely decide to withhold all credit. 

The CFPB’s rule will not enable increased credit access to minority-owned and women-owned small businesses. Instead, capital will dry up and no credit will make its way to traditionally under-capitalized businesses. In 2017, the Treasury Department published a report on financial regulation in the United States and recommended repealing section 1071 outright. 

The rule will exacerbate the issue that it is trying to solve.

The CFPB’s rule is also unnecessary. Without the CFPB’s rulemaking financial institutions were already increasing capital allocations to small businesses. According to the Small Business Administration, from June 2017 to June 2019, small business loans grew by 4.1 percent to $645 billion from $619 billion. 

Rep. Roger Williams (R-Texas) understands the intricacies of this issue. In the 116th Congress, he introduced legislation to repeal section 1071 of Dodd-Frank. The Preserving Small Business Lending Act of 2020 (H.R. 5574) aimed to encourage capital flow to small businesses by letting financial institutions conduct proper risk analyses without the overburdensome reporting requirements that cost time and money. 

Congress’s role should be to provide incentives for financial institutions to direct capital to small businesses. Promoting deregulation with the proper safeguards against discrimination is the right approach. But opening the door for federal agencies to gain leverage to intervene in private contracts is distortive and may end up promoting discrimination instead of ending it. 

Ensuring all small businesses have access to capital is vital for the sustainment of a strong American economy. However, it is wrong to assume that the federal government will know what financing decisions should be made between a private lender and a private borrower. The CFPB should let financial institutions do their job and continue to make risk-based financing decisions. This both allows capital to flow to businesses with successful businesses models and ensures that credit can continue to flow. 

In their announcement of the proposed rule, the CFPB gets one thing right, small businesses are the lifeblood of the American economic engine. Unfortunately, their proposal fails to accomplish their goals.  

Bryan Bashur is a federal affairs manager at Americans for Tax Reform and executive director of the Shareholder Advocacy Forum.