NCRC Just Economy Conference 2023 — Recorded March 30, 2023
CFPB Director Rohit Chopra announced the final rule implementing Section 1071 of the Dodd-Frank Act at the 2023 #JustEconomy Conference
Speakers: Rohit Chopra, Director of the Consumer Financial Protection Bureau; Jesse Van Tol, President and CEO of the National Community Reinvestment Coalition
NCRC video transcripts are produced by a third-party transcription service and may contain errors. They are lightly edited for style and clarity.
Thanks to all of you for being here, in person. And it’s really great to be in the same room. It’s so many people here who I think share a point of view that those who are powerful, have to be held accountable, have responsibilities. And this is just the beginning of making sure we make that transition want to thank my colleagues, this table of regulators, always the most fun table and everyone else who, who is part of this, thanks to NCRC for inviting me. I’m really excited to share that the CFPB is issuing a new rule today that is actually the product of many people in this room. Many many years ago, in fact, it is to implement words on the page but words on the page that mean a lot section 1071 of Wall Street Reform and Consumer Protection.
I have to say what it’s about! No, you have to let me– you have to let me, you know, you can’t give praise that quick! You have to you have to look stern, and judge and then you– Anyway.
This is a dormant provision of law that requires the creation of a new dataset on small business lending in our country. Today, I will focus my remarks — the scripted ones that the lawyers look at — on small businesses and how they can drive growth and be a vehicle for wealth creation for everybody. I will also discuss some of the lessons that were learned about small business lending through the paycheck protection program. And I’m also going to touch on the Community Reinvestment Act and how this CFPB rule will help ensure that lenders are providing fair and non discriminatory access to credit.
I’m going to close with some thoughts on the recent liquidations and failures of Silvergate, Silicon Valley Bank and Signature Bank. As I think everybody in this room knows more and more sectors of the economy are dominated by a handful of giants, run by a small clique of people who are not always responsible or accountable. Over the years we have seen relentless consolidation as supermarkets, airlines, hospitals, telecommunications firms, pharmacies, agricultural companies, tech companies, and more merged within their respective industries to become bigger and more powerful.
Fewer communities and neighborhoods house the headquarters of businesses and instead are dominated by outposts of large and often distant firms. And people in our country often talk about homeownership as a critical goal for wealth building, but you know, small business actually has a real story there too. More money gets invested locally. More workers are hired locally, students who graduate can go back home to work locally. And rural towns in particular, often center their economy on small enterprises, small businesses, local businesses.
And as COVID-19 rolled through the country, and through the economy, I think many small businesses really found themselves on the brink. So you know, family, farmers, and other sectors critical to the economy. We’re up ended by turmoil. I think if you remember this, you know, this is March of 2023. So three years ago, it all started and what happened three years ago.
Very, very quickly, large firms got special access to credit facilities, liquid, you can call it anything you want, “liquidity, “whatever. But it was money. And they were able to stay afloat.
But small businesses, local businesses did not have that. So Congress passed the Paycheck Protection Act paycheck protection program to help local businesses keep paying their workers and ultimately, this funding did save so many of those businesses from going under. But you know that but the paycheck Protection Program was far from perfect. And so many businesses struggle to navigate the red tape and bureaucracies of the largest banks. While small businesses served by the local banks and others, they did a little bit better.
There was though, data, not just concern but data, that showed that borrowers, especially women, minorities, others weren’t able to access those loans when they needed to save their business to save their own workers and more. In fact, testing by this organization, NCRC, found that black women were generally not encouraged to apply for a PPP loan.
At financial institutions they approached and survey data from the New York Fed showed that black and Hispanic owned small businesses that applied for a PPP loan during the pandemic, were less than half as likely to be approved as their white male counterparts. So one of the reasons that we had these problems was there was a lack of a comprehensive and clear data set on small business lending that made it tougher to target and reach the people who were most in needed need of help.
We heard the stories remember, there was the “small business” that got PPP, but they actually were like a billion dollar hedge fund sometimes. But where was the ones who were on in the neighborhood who you knew many of them, were not able to get it.
And oversight of pandemic efforts was made more difficult because the government in some ways was flying blind. There was little viable data from lenders on how funds were being dispersed to applicants. Problems were tough to spot. And it was extremely difficult to identify the areas most in need. The SBA, as you remember, didn’t include demographic questions on the early round the earliest rounds in 2020, of PPP loan applications for nearly $500 billion in disbursements.
So we didn’t know if it was really impacting the cities, the towns, the communities, the neighborhoods that we wanted it to help. So there are several federal laws that require banks to demonstrate that they are meeting the credit and financial needs of the communities which they serve.
I think many of you know these laws, but it’s sometimes worth repeating. This is not, like, a suggestion. It’s actually enshrined in our nation’s laws. For example, the Federal Deposit Insurance Act requires an evaluation of how the institution would meet the convenience and needs of its community before even getting deposit insurance.
So this is part of the covenant. There is an agreement that is formed, and regulators are supposed to supposed to carefully weigh the impact on the community when evaluating applications under the bank merger Act. The National Bank Act and other law requires national banks to provide fair access to financial services and fair treatment of customers. Again, it’s literally in the law.
And so I think we have to when we’re thinking about CRA– CRA requires financial institutions to serve those needs, not just those who are you know, wealthier, powerful, but lower income, moderate income everyone. And all of these laws recognize and codify that banking.
Banking is not just some business, it’s the plumbing, the infrastructure, the grid, of how our economy works, and when it doesn’t work, we know that there are consequences. So, when it comes to the CRA, many of you know, there’s a process ongoing right now to refresh the rules to ensure that banks are meeting those needs. The Fed the FDIC, the OCC last year issued a proposal to amend those regulations. And we expect the final rule to come soon. And as a member of the FDIC board, I did support that change the proposal.
And I think one of the things that I want everyone to keep in mind, it’s an anti-redlining law. But it’s not just about a particular type of neighborhood, it’s it’s everywhere, including those who are in rural areas, many of the towns that there has been so much flight from an I really do think that there has been so much decline in branches and services in towns across America. And that can’t just mean that that those places get left behind.
So here’s where they all connect the CRA. It can’t just be hand waving, it needs data. And so the agencies collect data to assess the performance of banks when it comes to the test. And a major change being considered by the agencies is for them to rely on the data that the CFPB will be collecting in this rule. So it’s not again, just just one little, you know, we’re going to ask for some numbers. We’re trying to figure out how it has teeth.
Not just in fair lending, but also CRA, not just you know, making PPP better, but making sure it’s accountable to everyone. So today, the CFPB is finalizing this rule. And it will require lenders across the country to report key data, including demographic data on small business loan applications.
In many ways, this rule is similar to the Landmark Home Mortgage Disclosure Act, which many of you know by merely asking for the data, it changes the way lenders think it requires. And we have learned, the regulator’s all of you, we’ve learned we’ve, we’ve learned a bit about HMDA — the home mortgage disclosure act. And we’re using those learnings to help small businesses, making it easier for them to provide data and maximize the usefulness of the data to everyone including you.
So through our new rule, the CFPB will over time, make data public, to give local communities investors, governments, all of you deeper insights into the trends of small business lending across America. And it’s going to help detect, it’s going to help deter illegal discrimination, which is very important. It’s also going to allow programs like PPP to be designed more effectively and reach the people who we want it to reach. And like I said before, it’s going to give the CRA a lot more teeth when it comes to small business lending.
So here’s how it works. The rule implements a provisional law, as I mentioned, enacted by Congress a long time ago 2010. It will require banks, credit unions and other lenders, including some of these non banks who have popped up to provide information about loan applications, including whether the applicant was approved or denied the pricing, important demographics and more.
So the small business lending rooms rule is also going to help us move forward when it comes to demographic subcategories on race and ethnicity. So it is not just going to ask, and I check off, you know, Asian American Pacific Islander. It’s also going to be able to give you the ability to say Indian American, Korean American, you know, much more texture, because we know that there are differences and we know we lose something when we lump everyone together. And this is so important given how much minorities immigrants others are part of franchising small business starts, especially those local ones.
The limited data we have on small business lending really does suggest that access to small business credit really can differ based on these different groups. The data also suggest unmet needs among small businesses and farms in many rural and lower income areas. Small businesses are especially important job creators in rural America. So the wealth of those towns, the wealth of those areas depends on good access, and importantly, fair access. to small business credit, I could talk a host separately about farm credit and discrimination there. I will save that for another time.
But I think you know that that is a very important part of what we need to accomplish here. So when the CRA was passed in 1977, the law applied strictly to banks, as they made up really the vast bulk of lending operations. And at the time in the late 70s, this is really before all the kind of securitization boom, modernization capital markets, that has been, you know, a mixed bag, but it exists now. So not it, I’ll tell you now non banks are a bigger, bigger piece of the pie. non bank mortgage lenders, for example, are the bulk of the origination market now, and isn’t it’s so important that they had to comply with HMDA.
Our rule will make Of course, non banks provide small business data, we’re going to be able to have a full sense of the entire market. The rule defines a small business as one with gross revenue under $5 million in the last fiscal year. And along with support from the SBA, we established this straightforward definition of what counts as a small business under the rule, so that people can easily determine whether an application is covered. The information will eventually, as I said before power a public database that will essentially serve as the American census on small business lending. The impact of the rule will be in the comprehensive data that it produces, which can be used by lenders, borrowers and the broader public.
We’re going to phase in the collection requirements by having the largest lenders go first. And over time lenders who make at least 100 loans per year will eventually report. And while many will certainly seek to report early, we’re thinking through a supplemental proposal to give a little bit of extra time for financial institutions who already get high marks on serving the credit needs of their community.
And under the proposed updates to the CRA under consideration, banks would not have to separately provide data to different regulators. This data set will be the lodestar, it will serve multiple purposes and make small business lending fair. Well, applicants will be able to refuse if they don’t want to answer certain questions, lenders will not be allowed to discourage responding, this is going to be hard.
We intend to focus our enforcement activity in connection with the new rule to ensure that lenders are not discouraging small business loan applicants from providing responsive data, including their demographics, lenders will be able to reuse certain data, you know, like race and ethnicity to minimize applicants repeatedly answering the same questions. Of course, protecting this data, the privacy of applicants is is going to be important, and it’s going to be something we all have to think through together. As we continue our work to release summary data and the public database.
We’ll be working with experts and others on how to protect privacy and guard against re identification. None of this is revolutionary. It’s in the law. And it’s pretty obvious that we had to do this. And you’re probably asking why it’s taken the CFPB over a decade to finish the rule. In fact, the California Reinvestment Coalition I there’s some of them are right here had to sue us.
And then we got to be under a court order to finish it. It’s worth applauding.
You’re probably also asking why it’s taken decades to update the rules under the CRA another good question. But I think it’s coming soon the federal banking regulators will have final rules that work in tandem with this one.
And I also just want to put in one plug for something. There’s also I mentioned the non banks you know only the banks are covered by CRA There’s some really terrific state laws out there that are CRA for non banks. And actually, I think this is totally important and needs to cut, we need to cover the full range of players out there. And a lot, you know, a lot of those nonbanks also get a lot of benefits, and also should have some similar responsibilities.
So I guess I’ll say this, there’s no really good answer for the delays. I apologize on behalf of the agencies for not doing it sooner. And because we know that the cost to small business owners and local communities of not acting earlier, especially before the pandemic, I don’t know if we’ll be able to put a price on that.
So we are moving forward, it’s going to happen. And I want you to think about this in the context of what is going on these past few weeks. And I want to say a few words about the recent bank failures, which also relate to the costs of inaction. Lots of discussion we hear, especially in Washington about the costs of doing something, the costs of regulating, and I always respond, what about the costs of not doing something. And I think that’s really clear today.
You know, when a small business fails, it’s it’s obviously bad customers and employees all suffer. When a local bank fails, it’s devastating to a local economy. A lot of people will start scrambling, especially local businesses, it cuts off opportunities for so many small businesses who were overlooked or poorly served by the big non relationship banks now, but when a massive bank fails, it can literally create chaos for the entire economy.
And in the past month, we’ve seen the liquidation of Silvergate bank, this was a crypto affiliated bank, and the failure of two very large banks Silicon Valley and Signature. The government has taken some extraordinary measures to contain the collateral damage of the failures.
And again, I really think that instead of paying just close attention to the costs of supervision and regulation, we’ve got to put the microscope on the costs of inaction. And financial institutions have a very special responsibility to their local communities and the broader economy.
The increased benefits that banks and non banks have received over the years, particularly during the pandemic, from direct and indirect government support has should really put into clearer focus, that they have legal obligations when it comes to meeting the needs of local businesses.
And just like having small business lending data feels like common sense. It’s also common sense for our financial institutions to follow the law, and uphold the standards to best serve their communities, especially after having benefiting so much in public support.
In the coming weeks and months, we’re all going to need to come up with answers on how we address these failures and fix it for the future and live up to these goals. So your conference, adjust economy, as you think about how we create a just and thriving and fairer economy. We should not lose sight of the role that financial institutions play, to help small businesses startup grow, thrive and survive.
We do not want to live in a country that is just dominated by a handful of companies.
And instead we want to make sure our financial system is promoting opportunities for all.
Thank you. Thanks for having me.
JESSE VAN TOL: You have time for a couple of questions, Director? Staff is gonna kill me I wasn’t supposed to do this. But we are gonna take a minute for a question and or two. And I was I was struck Director by– you talked about consolidation. And the current moment we’re in sort of the cost of inaction. And, you know, I think we will see further consolidation and past consolidations in this kind of moment. Have often you know, and rightfully so, but about safety and soundness, but the whole fairness aspect of this, you know, we’ve reflected that these banking institutions really chartered for a purpose. Historically, charters were something time limited granted by the government or in many cases the king as as sort of maintaining the power of the governing entity over those granted the charter, how far have we strayed from that concept. And really, you think about this, or put it in the context of 1071, the obligation really of the Chartered Institution to provide data, basic data about what’s going on, I think it’s relevant for the current moment, in terms of what we don’t know about Silicon Valley Bank, what we don’t know about Signature Bank, and what we would like to know to avoid what we don’t know about PPP lending, because we didn’t have in place a requirement to report demographic information, Shouldn’t that be a real condition of the charter, in addition to a statute that we passed?
CHOPRA: Yeah, if you look at the history, I think we should think about banking, just like we think about the electric grid, the telecommunications infrastructure, this is stuff that you need for the society to survive. And we don’t want companies forming business models and just grabbing a bank charter because it helps them get public subsidy. You’ve got to pick, if you’re in an operating a bank, you follow the CRA, you meet the needs of the community, and we can’t make it qualitative, you gotta measure it. And the only way to measure it is if you get the data. So I think that we have to really push ourselves to ask, what are we doing to uphold that covenant between us and granting that charter, and I think we have a lot of work to do, as we have seen so many institutions merge, get bigger, and often become too big to fail. And there’s a lot of work we have as a group, including those who are in banking, to really in some ways, go back to those basics.
VAN TOL: And some new ones, a transparency law, hum knows a transparency law, but they’re sort of brought together and you talked about this through CRA, which is really an accountability law. And it’s a public accountability law, it says, you’re doing these things, you need to report on them. They’re in your CRM exam, people need to have an opportunity to comment. Of course, the most powerful sort of crowdsource way of looking at data is to make it publicly available. So what can you say director about the public availability of 1071? How will it be available in the marketplace for certainly consumer advocates, and for that matter, even investors and other actors to really critically look at what is happening in these markets?
CHOPRA: Well, we’re obviously still in the design phase of that, we could make something pretty, but there’s no data yet. So once we get that, we’re going to look at privacy, we’re going to look and figure out, how will we be able to publish summary data, loan level data, and everything in between? It’s gonna take time. And I will say that we’ve given how much demographic information we’re collecting. What are we going to do? And what can we learn from HMDA, about how to make sure that individuals, you know, don’t get re identified in the process. So it’s good, there’s more work on this to come. But I hear you, though, that just having the data set is very, very powerful. You know, especially when you can identify, you know, what lender different lenders are doing.
VAN TOL: You’ve taken significant action recently around junk fees, were what really should be the guiding principle when we think about those fees, which get charged customers, which may not add any value to the customer. And in fact, there may be very little risk within the context of of overdraft you see fees that are really disproportionate to any risk a banking institution might take on what should be the principle we understand and know the actions you’re taking. But how can we conceptually in principle, think about what might be a standard for thinking about those kinds of fees and practices?
CHOPRA: Well, I will tell you I’ve been it’s a little ironic, and I’ve been it’s not gone unrecognized the past several weeks that At when large firms or large banks have liquidity issues, there’s all sorts of government action to make sure but when an individual or of family has a liquidity issue, they get a mountain of fees on them, making it even harder. So I think about that a lot. And we have to, you sometimes see Jesse, these even in bank mergers. Sometimes they purport that oh, look at all this efficiency we’re creating, you know, not often means laying people off and closing things. And when you look, after you ask, Did you lower any fees? Like where were the benefits? And I think that’s something we’ve got to think about in and really measure up when we’re looking at some of these mergers about what are the actual benefits? And what are they willing to really agree to? Or what should we be ordering. But I really think of junk fees as something that is just creeping across the whole economy. And it’s part of making it more expensive to be poor. And this is, these aren’t these these sometimes these fees are for fake services that people didn’t even want. And I think that’s just not the sign of a fair competitive market. So across the board, not just us, you see it, across government, we’re really looking hard about how to just get rid of some of these junk fees and make it more fair and competitive.
VAN TOL: I couldn’t agree with you more on the public benefit or the benefit to customers, we’ve argued, our whole community benefits plan as a way of, of documenting, demonstrating how communities and customers might benefit, but But it needs to be written into the order needs to be strengthened, and it doesn’t speak to pricing, or what are the actual effects. So, so couldn’t agree with you more.
CHOPRA: Well, I the last thing I’ll say is, we’ve we’ve already in many ways passed these laws. It says the needs of the community, fair access. So let’s define it. And let’s let’s do it. And I think the only currency we have is time.
VAN TOL: Terrific. Well, another big round of applause for Director Chopra. For finally getting 1071 done. I don’t think I’ve ever seen someone so happy to have been sued.
CHOPRA: No, I’m not happy! I wasn’t sued. I wasn’t sued!
VAN TOL: You weren’t there. He wasn’t there at the time. But but but but you got it done, and it’s a big day for us all. So thank you. Thank you.