Online Event Archive Recorded May 18, 2023
CFPB Director Rohit Chopra announced at the 2023 Just Economy Conference the final rule implementing Section 1071 of the Dodd-Frank Act that will increase transparency in small business lending and help root out discrimination. Our initial analysis can be found here.
Panelists overview the new rule’s features, how it will be implemented, its strengths and weaknesses and items that are still open for consideration by the CFPB.
Speakers:
Beverly Brown Ruggia, Financial Justice Program Director, NJ Citizen Action
Kevin Stein, Deputy Director, California Reinvestment Coalition
Kevin Hill, Senior Policy Advisor, NCRCÂ
Transcript:
NCRC video transcripts are produced by a third-party transcription service and may contain errors. They are lightly edited for style and clarity.
Speaker 1 0:03
Thank you very much again for coming. Today we’re going to this webinar about section 1071. And the final rule that was released in March. Really quickly, this is our agenda today. We’re going to go into speaker introductions, we’re going to be discussing the purpose of section 1071. Data. What what is it? What does the 1071 rule do? The strengths and weaknesses of the final rule, we’re going to talk about how you can use 1071 data when it starts to come to the public. Some items that are still open, and then attempts to repeal and then we’ll close with a support, sign on letter and some q&a, we should have about 15 minutes of q&a at the end of the today’s presentation. So to dive right in, I will introduce myself first. I am Kevin Hill. I’m the Senior Policy Advisor here at NCRC. I moved over to the policy team this year. Some of you may know me, from my role in the organizing team I was in for the last couple years. So now I’m going to turn to my my great co presenters today. First, Beverly.
Speaker 2 1:13
Thank you, Kevin. And thank you for inviting me to join the webinar today. My name is Beverly brown Rudra. I’m the financial Justice Program Director for New Jersey citizen action. We are a member of NCR NCRC and have worked with organizations across the country like CRC in our care work in our advocacy for small business. And I also happen to be the chair of the community advisory board for the CFPB. Although I am not representing the cab here today. But in that capacity, I see a lot that goes on in terms of small business lending heaven.
Speaker 3 1:51
Thanks, Beverly. And hi to everyone. My name is Kevin Stein, I’m the Chief of legal and strategy at the California Reinvestment Coalition. We’re a statewide advocacy group. I’m also a member of the NCRC board of directors. And I also want to thank NCRC, for hosting us, and for inviting me and thanks to everyone for joining and participating.
Unknown Speaker 2:19
Given you want to take it away on the purpose of section 1031.
Speaker 3 2:22
Yes, so for the next hour or so, we are going to get into a fair amount of detail and specifics relating to the rule. And for some of you it will be maybe more than you wanted. And for sure others it will be less than you wanted. But I definitely wanted to start us off by acknowledging the gravity of this moment and to say that and I think many of you hopefully all of you will recognize this is a big win for small businesses in underserved communities. So we just wanted to note that that’s one thing you should take away from all this. And to thank everyone out there for all of your work to make it so there were a lot of people for over a long period of time that got us to this to this day. All right. So section 1071. I think as most people know, it’s part of the Dodd Frank Act of 2010. There are two important purposes that Congress identified for the rule number one to facilitate the enforcement of fair lending laws. And number two, to enable communities, government entities and creditors to identify business and community development needs and opportunities of women owned minority owned and small businesses. So why do we care? Why do we think this is so important? Well, we know that discrimination persists in small business lending and small farm lending. The transparency that will be provided by the data under the rule will bring help to regulators, advocacy groups and lenders to help them identify and address discriminatory lending outcomes. And this is similar to the home mortgage disclosure Act, which I think many of us are may be more familiar with, where we believe the mere fact of transparency and just the knowledge that information about lending will be made publicly available, is going to lead to better lending outcomes, more fair lending, and where there are instances of where there are outliers and there’s evidence of discrimination. With this data. As a society we will be in a better position to address that through enforcement and policy. Getting to this point has been a struggle and has been a long effort. The California Reinvestment Coalition was was really pleased to play our part a few years ago in joining with democracy forward and now cab in UK couple of small business owners who are part of the Main Street Alliance in suing the CFPB for failing to develop the rule, and we were really so happy. A few not too long ago, was it a couple of months ago, to be at the NCRC conference and to hear director Chopra unveil, unveiled the new rule. And I was particularly happy to be sitting next to Beverly at that moment and, and my boss Paulina Gonzalez Brito a good moment. And, of course, it felt good because the rulemaking, the like the road to the rulemaking certainly led before that day and before the lawsuit, and even before the Dodd Frank Act. And I wanted, if I could, with your indulgence, to acknowledge a couple of people, a couple of California leaders, who I think a lot about when I think about 1071. And this long road. The first two people I think of number one is Alan Fisher, who was the founding director of the California Reinvestment Coalition, and led our small business lending advocacy efforts over many years, and who retired in at the very end of 2013. And his last act as a CRC director was to hit the send button on his final small business lending report The Little Engine That Could, as a number of people know Alan passed away about a year and a half ago. The other person i I’m thinking a lot about now is Clarence Williams, who was the longtime director of California capital Financial Development Corporation CDFI. In the Sacramento, greater Sacramento area, serving small businesses for many years, he was on CRCS board of directors for many years, he was the very first person I heard, talking about this data and how disadvantaged small businesses were and the small business community was by not having information that, you know, looking across the aisle so to speak, we could see in the mortgage context and the housing context, the groups serving those communities did have, and how having that data would make such a difference and was really necessary. He was a strong advocate for this for many years, as I say, like the person I think of when I think about this role along with Alan, and I’m very sad to report that Clarence passed away about a week ago. So it is very sad to think about the two of them, but good to think about them in this context where they both were pleased to hear how the rule has been developing over time. And I am hopeful that we will be able to honor their legacies and the legacies of others like them, who worked for this rulemaking and to do so really by fighting to defend the Consumer Financial Protection Bureau and the section 1071 rule, which are both under strong attack edge, as we’ll talk about a bit later, and to use the data when it comes out to advance the interests of small business, small businesses and increase access to credit. And with that, I will turn it back to Kevin.
Speaker 1 8:21
Hey, Kevin. Now we’re gonna turn to you, you know, what does the 1071 rule do? It is designed to really shine, shine a light on blind spots and small business lending. And it requires small business lenders that originate at least 100 loans to small businesses or small farms, and each of the last two years more on that soon to start annually reporting on their small business lending by race, ethnicity, sex, less gender and sexual orientation. And so the NA defines a small businesses one with gross revenue of $5 million or less and excludes nonprofits. So that’s the number of loans it’s it’d be at least 100 loans in the previous two years, to businesses that are making $5 million or less. It requires the race, ethnicity and sex/gender collected for principal business owners, which are defined by the rule as individuals with 25% or 25% or more of the equity interest in a business. So by that definition, a business can have a maximum of four principal owners because by definition, they have 25% control. It defines a business as owned by a person of color women or member of the LG BT QI plus community. If two conditions more than 50% of ownership or control is held by one or more members of that community, and more than 50% of the net profit or loss accrues to one or more members of that community. Here is the implementation schedule and for You’re wondering whether this is kind of a quick just this is what’s in the rule. And then we’re going to the next section, we’re going to spend more detail on, you know, what are the real strengths here, and what are some things that might need to be improved down the line. But here’s, here’s the implementation schedule. It’s a tiered implementation schedule. As you can see, the largest lenders are sorted up first, the lenders that originated at least 2500, small business loans must start collecting data starting October 1 2020. For lenders, the middle tier is the people that are originating at least 500 loans, they have to start April 1 2025. And then finally, the smallest lenders that are covered by this rule, lenders that originate at least 100 loans in the previous two years, must start collecting data at January 1 2026. As Kevin touched on, and I’ll alluded to a little bit more, this is really likely to lead to increases in small business funding. Remember the saying what gets measured gets done, this really will, you know, get data, so long as it’s letting data, you know, into the 21st century. And really, you know, the director Chopra said it, when he announced it, there’s really just the change of requiring the lenders to report out, you know, really will shift attitudes, you know, lenders want to look good on these types of reports. It also, you know, will will really show lenders, how they’re stacking up to compared to peers, when they’re lending to underserved businesses and show them if they’re, you know, falling behind and need to do something, of course, you know, then you know, MCRC, and our members that are advocates will have the ability to, to use this data to really raise issues when needed, but also just be able to, you know, put things into better context and really see, you know, how, how business businesses, small business lending of a lender is playing out, and, you know, home to data as it was improved and gotten more specific on race and things like that led to significant increases for black and Latin X borrowers. And so we are anticipating that this will also similarly lead to increases for black Latinx Asian women owned and LGTB LGBTQI plus businesses as well. Furthermore, the last point, I’ll say, for now, you know, in 2020, a city bank did a study that found that fair access to lending for black businesses alone would have created 650 billion in additional business revenue per year and 6.1 million new jobs. So, you know, this 1071 data should be able to clear out and as a tool for detecting, and facilitating unfortunate fair lending laws. So it should greatly help addressing, you know, evidence of discrimination that we have found. And that’s why Citibank, you know, prepare this report that suggests that if you if there was just fair access to lending, we would see all these positive economic benefits that that really will bring widespread benefits to the economy. So now we’re going to turn more to that was sort of the high level, what is 1071? Do Now we want to turn to a little more in depth, and we the way we organize this is we’re going to start with sort of the strengths. And then we’re going to start with some areas that might need to be improved. But now I’m going to turn it over to Beverly.
Speaker 2 13:23
Thanks, Kevin. So what we know is that 1071 has very good coverage in terms of the types of, of small business and small farm lenders. The range is it covers almost all types of lenders, we’re going to touch a little bit on on some of the there’s some qualifications there that have to do with some thresholds. But we’ll get to that later. Overall, the coverage that types of, of lenders are pretty complete. And there’s some you I think you all have these slides, but the details are banks, credit unions, platform lenders, CDFIs, etc. So it covers a broad, you know, the full range of lenders. We also see that 1071 has good coverage of the types of loans. And we also are going to be looking at some pretty detailed data points, that as those of you who work in CRA know that more granular the data, the more accurate the analysis we can make, in terms of you know, what types of products there are, who’s getting them, etc. So the data points are good, they’re broad, there’s a lot of them. And also, the CFPB was allowed to there’s some there’s some data points that were required in statute, but 1071 also gives some the CFPB has actually put in some discretionary data points. And that is they are All stare additional data points, again, more granular and help us see more clearly what’s actually going on. So our turn to Kevin now who’s gonna go a little bit into those data points?
Speaker 3 15:10
Yeah, and, and just I know we’re trying to move through quickly. But just in terms of the the previous slide and the kinds of products that are covered just to flag a couple that we were particularly pleased to see included. Oh, thank you for going back. So one is credit cards, you know, a number of our members, and I think CRC members and maybe NCRC members have really been concerned that you know, is it it does, it seems like some neighborhoods are getting a lot more credit card loans than then term loans. So now and but that’s been hard, because of this larger problem of the of the lack of data, it’s been hard to confirm that, except in certain kind of exceptional circumstances. Now, we’ll have that data. And we can make a bit what we will, and also merchant cash advance. So this was, this is a very big issue for a lot of our members, including CDFIs, who find themselves having to kind of, you know, use up their precious capital to refinance people who got really, really taken advantage of in many cases, it’s through high cost lenders that may include merchant cash advance very little data on that there was a push to exempt merchant cash advance there. So that’s they’re included. And we’ll look forward to really being able to understand that market better. And then just moving on. So as Kevin and Beverly mentioned, a number of the data points were in the statute. So Congress essentially said CFPB, this must be in the rule. And so this is a list of those items. Some of them will seem familiar for those who look at Honda like action taken, Type and Type and purpose of loan credit includes things like whether the loan was secured or unsecured, and whether there are guarantees and what kinds of guarantees. So there’s a lot of really helpful information that we’ll be able to see once the data comes, comes out. And I think we can maybe move on to the next slide. And as noted, the CFPB, Congress gave CFPB, the authority to add some discretional points to really effectuate the purpose of the of the rule, right. So the to make it so that we can really help with enforcement around fair lending and understand community credit needs, the CFPB added these additional data points, and I will talk about just a couple, right, so we don’t want to go through all of them. And maybe I’ll focus on the first and the last. And then Beverly, maybe you’ll have, you can pick up one or two of interest, the pricing information, so that that is huge. Some of you may be old enough to remember that we had a subprime mortgage crisis not too long ago. And it was easy to see that a lot of loans were being made to certain borrowers and in certain neighborhoods, but we really did not have information at that time about the cost of those of those loans are these good loans or these bad loans. So without the pricing information, the data would really have been, I think compromised in our view would have been been much less helpful. So this is a big deal. We’ll have information not only about whether loans were extended and originated, but also the pricing experienced by the small business owners. And then lastly, the last thing I’ll mention here is, we were glad to see the CFPB include sexual orientation as part of a as part of this data collection efforts so that we can understand better the market in that regard, we do believe that there is discrimination, significant discrimination against the LGBTQ i plus community. And so this will help us understand that better.
Speaker 2 19:04
And I just want to, I’ll just pick one for now. But I am very happy that denial reasons are included. For a couple of you know, we talk to banks. Sometimes when we see why somebody has been denied a loan, we can go back to the bank and ask them to take a second look. That’s something that we do quite frequently. And so if we understand, you know, what, what the reason was, we can we can ask for that. It also helps us as an organization that works with small business owners, help them prepare, so they’re in better shape when they make their applications, but to now reasons is something that’s really important to know in terms of what banks are doing, but also what we need help entrepreneurs know before they even applied for the loans.
Speaker 3 19:53
Great, I think we can go to the next slide. So the next the next couple slides are regarding the discharge aggregated race and ethnic data categories. And in some ways, this is not anything new. And so maybe it’s like, well, we have this in the home mortgage disclosure act, it’s exactly the same as what we have now in the home mortgage disclosure act. But in a way, it is another big victory. Hunt 100 Not too long ago did not ask for this level of desegregation, this this level of detail regarding borrowers. And I know a number of CRC members over the years, I will go back to 2010 when when the Fed had authority over Honda, and was conducting community meetings around like what what should have to be if Honda is lagging the market, we’re having less information that’s publicly available. To really understand what’s happening today. We had members in particular representing the Asian Pacific Islander community saying the broad Asian race category was having the effect of masking discrimination that was occurring within the Asian American community. And we you and others NCRC capacity, maybe you need us as well, a lot of groups really fought to get to this point of disaggregated data, which we think is really important. And I know NCRC is reporting that borrowers are getting more and more comfortable reporting this data. So we have a fuller picture of what’s happening in the market, and really glad to see that has been applied to the 1071 small business context. And people can see the segregated categories, and maybe it’s not necessary to kind of go through them. Great.
Speaker 1 21:43
So now we’re gonna move into a section where, you know, we’re going to discuss some areas where we do think that the 1071 rule might need to be improved. Before we get into this section, though, it is helpful to remind people that, you know, despite, you know, there are some, you know, some some serious concerns. But this, the final 10 Second rule still greatly expands our knowledge or knowledge of the small business lending landscape. And these are areas that just, you know, going forward, as the CFPB starts collecting this data, and then eventually releasing it to the public, there’s just some assets that we think are gonna have to probably get cleaned up. And that’s similar again to the home mortgage disclosure Act, which has been no consistently approved, getting the the disaggregate racial data that Kevin Stein was just talking about. So we just think that these are areas that you know, are the first areas that are most likely going to need to be improved as the state moves forward. The first is that the 100 loan threshold, this, there’s a good chance that the CFPB will determine that this needs to be lowered to increase coverage of banks in particular. And also, you know, in coverage in general, the originally the CFPB, proposed a 25 loan threshold, that would have covered around 75% of banks, the hunter loan threshold is estimated to cover about 36% of banks, which clearly shows a large amount of banks that are not covered at the 100 loan threshold, that does create some, some complications within using 1071 data. Because if there’s fewer peers right around that 100 loan threshold, it makes it harder to make comparisons and truly use the data to you know, put a specific lenders lending into context, we know there’s going to be a fair amount, you know, above the 2500, level and 500 level, but if there’s very few that are right around that 100 level, it just harder to make comparisons, and that has a kind of larger impact on like smaller cities, Rural areas, because that’s where, you know, smaller lenders tend to be headquartered. And so that could be that it’s highly likely that CFPB, you know, after they start, you know, collecting data, and after, you know, NCRC and our members start analyzing this data, that’s something that they’ll need to revisit, it also potentially makes it complicated. We all are waiting, the final CRA rule, which we expect has come out sometime this year. And the regulators did propose in the MPR for the CRA rule that 1071 data would sort of replace CRA small business data since it’s much better and not make, you know, have two different small business data requirements out there. But at the 100 loan threshold, there could be large banks that aren’t at that 100 loan threshold and so then it creates a complication of like are we gonna have split reporting systems based on if your now attends anyone and then CRA still applies? So it just it makes things a little more complicated and ways that the initially proposed 25 loan threshold wouldn’t have because it would have covered more of the the involved actors. Also another change from the initial proposal to the final rule is the final rule does not require lenders to complete demographic information when it was not provided by the applicant as rules for mortgage lending do. And as first proposed by the Consumer Financial Protection Bureau. This could result in significant amounts of missing demographic data. We’ve seen instances like for instance, the PPP program, in the PPP program, it was optional for applicants to submit their demographic data, and 25%. Only 25% of PvP applications included that data because it was optional. So that really, we clearly need, you know, we can’t have anywhere near 75% of 1071 data missing demographic data. And it gets to this really kind of gets almost to like a paradox. You know, or at least some of those people that are choosing not to provide their their race or their gender and business loan applications, it’s safe to assume at least some of them are not doing so because they’re worried if they do so they’re your application will be viewed less favorably. Basically, they’re worried they’re going to be discriminated against. But the paradox here is that without having this information, it’s much harder to address and identify and root out that discrimination. So that’s why, you know, the rule requires, you know, notices being provided, and there’s firewalls as well. But now, we really think the CFPB may need to reconsider this proposal, because mortgage lending already works this way. You know, if it’s not provided they they rely on a visual observation or surname. And we know that’s not perfect. But you know, there’s ways you could, you could, there’s ways the data could be set up to highlight, you know, this is instances where that was used. And we think this is something that may need to be reconsidered. Also, the freeform submit submission of sex last gender instead of set categories. freeform, I’m sure the CFPB is thinking about ways on the back end, freeform, so everyone is clear is instead of a set number of categories, you have a a form that you would either write in paper, write online, you know, your your sec, slash gender. That was initially they were proposing to do set categories and giving people the options to not provide, or the option to self describe. You know, we looked at this, and we looked at recommendations from some experts on that really looked at, you know, issues of gender identity and gender expression. And, you know, we would really think that, you know, this shouldn’t be looked at, again, we would suggest better categories, because it’s just better for data. There’s much less, you know, variation typos, and I’m sure the CV is thinking of ways to address that on the back end. But it’s not, you could have made it all a little easier on yourselves by coming up with subcategories. And it’s important those categories that we have space for transgender owned businesses to indicate, you know, their their businesses, there’s there’s pervasive evidence of discrimination towards transgender individuals, and it was great the CFPB, you know, added sexual orientation. But you know, by creating a sort of transgender gender category, we would have a better sense of how businesses owned by transgender individuals are being served, which would be very valuable. Other things, you know, some other things that didn’t quite make it in that would have been good include. They chose not to include factoring. They’re also some data points, we would have liked to see credit scores. Middle new credit scores are not one of the data points that are being collected, Middle Eastern and North African, continue to not be continued to not be allowed. It’s an option on there also currently not in the census. They’re not in Honda, with the Bureau largely kind of differed a bit on this one. But we would have liked to see a Middle Eastern and North African category, as well as also the bureau decided not to add a category as well for businesses owned by people with disabilities, which is something that NCRC and many others suggested they do. Now I’m going to turn back to Beverly, who’s going to talk a bit more about how to use 1071 data.
Speaker 2 29:43
Thanks, Kevin. So now we have all this rich information and you know, we’re going to spend the next few years figuring out how we’re going to use it but there are some ways that you know, fit in with our traditional CRA work. Obviously comparing You know, the performance of, of lenders looking at peers, you know, looking at the numbers in a community that reflect what different banks are doing is going to be important. So that comparison is, is critically important. We’re looking at applications, you know, the originations, what neighborhoods they’re in their denials based on race, etc. And then making comparisons across different business sectors, etc. And we also want to look for, you know, as we start getting into collecting the data, lenders who are missing demographic data, are they’re doing enough outreach to the communities where they do business, what how are they presenting the application or the information on the applications that will give us the data that’s, you know, called form 1071. And one thing that’s really great is that we know we exist in action, rely on NCRC for a lot of the data analysis, because there isn’t going to be a lot of information. And so they have some tools that are really quite helpful to organizations like mine advocates, and even members of the public. To look at the data and understand it, you know, they’ll they’ll put it together and analyze it in a way that you can digest it more easily. I also just wanted to talk more generally about uses as a CRA advocate, and the way we see this information being used in our industry. So first of all, we know that this information gives regulators in what they need to do to hold lenders more accountable for their obligations to lend in the communities where they do business. They’re going to have more granular information, when they’re reading bank, when they’re doing CRA rating, they’re going to have the information they need to make better decisions about mergers. And then we as advocates, will be able to sit down with the banks that we work with endpoint to very specific issues with the way that they’re reaching out to or working with the communities that we support that we advocate for. So it’s a tool that we can use, we’re working with banks to help them improve their improve their performance. And as with Honda, the more specific the information, the more specific we can get about looking at how they’re marketing how, you know, do they have representatives in the bank that reflect the community, that’s, that’s applying for these loans, the people that are actually looking for the loans. So that’s a tremendous tool in working with the banks. It also allows us to weigh in positively or negatively on merger applications. As advocates, we look at the way banks have performed. And if they want to get bigger, it’s our view that they need to be better. And so they need to start out with a good strong record. If they don’t have one, we’re happy to work with them to help them improve that record. And this kind of granular information on small business lending will enable us to do that much better. We have now we have the Honda. But combined with the small business data that’s that’s been talked about today, we’re going to have much more accurate and productive participation in the comments that go to regulators when it comes to merger applications. And also, I want to say that, you know, we also work with small business entrepreneurs, helping them understand, you know, why they’re not getting loans, help them also become activists for their communities and talk about the fact that their communities are not being lent you equitably and fairly, and that information is something that’s important to the public. We also finally think that this is incredibly important information for the banks. And when we we, we sit down the banks, we assume that they want to be lending to everyone in the communities where they do business and they make money, we assume that they want to do that fairly and thoroughly. And so it gives them the opportunity to identify untapped markets, maybe they just don’t understand where they are. And helps them understand of the demand for the type of products that different communities need. And entrepreneurs in different communities, entrepreneurs that come from different populations. So those are ways that I see the data becoming very specifically helpful in the work that we do, to make sure that fair lending is carried out properly and that care obligations are met.
Unknown Speaker 34:50
Thanks for really turning back to Kevin Stein.
Speaker 3 34:54
Thanks to you both. So there were a lot of questions answered by the rule by there, but not all questions were answered. And one big one, one really big one is regarding what which of these data points is going to be made available to the public. So if 1071 is a transparency statute, and we’re going to use that we’re going to use the transparency for, you know, for the greater good, we need to, we need to see, we need to have the transparency, we need to be able to see the data. What is the CFPB concerned about, they’re concerned that the data will be so detailed that this particular businesses can be identified, they can be re identified. And that would be a bad, really bad outcome. And we’re concerned about that, to the extent that that could happen. But we also, you know, we have the experience, but like with a lot of this, where we can look to the home mortgage disclosure act, where there’s a lot of data, and for many years, group lenders have argued about, you know, we were concerned about privacy, and we’re worried that that privacy is going to be violated. And there’ll be read identification, rich risk. And Josh silver of NCRC. fame has has often noted that in all the years where these privacy concerns have been raised, that we’re not aware of any instance where 100 data was used to re identify a borrower. And we think similarly, the concerns, it’s an important concern, but we think it can be dealt with through modifying the data and how it’s presented to the public. And we’re really looking forward to as much of the data being made available to the public as possible. And why because that’s the purpose, Congress said, we want to have this rule and this data available, so that we can effectively enforce fair lending that will be compromised if we don’t have access to all the data, and so that the public can see and lenders can see, and local governments can see where are their community needs that are not being met? Where are their opportunities and gaps. And if we don’t have the data, we can’t do that. So hopefully, there’ll be a good resolution. And probably I think the CFPB has indicated it’s not sure how, in what form it will come back to the public with this proposal. And but probably, though, I assume there’ll be an opportunity for us all to engage. And so we should be prepared to do that at the at the appropriate time. And then there’s one other issue, we wanted to flag, the CFPB somewhat curiously notes that there may be a process for smaller lenders that have quote, demonstrated high levels of success in serving their local communities, as measured by the CRA and any similar state laws, that maybe they would get more time to comply. And I think our feeling maybe our collective feeling at this point is we’re not so sure about that one, there does seem to be a fair amount of time to comply. And we don’t know exactly what what that phrase that’s in quotes means. And regardless, it does seem like we’re talking about two different things that CRA important we all love CRA. It’s about. It’s been, you know, the focus has been on LMI and low and moderate income communities and borrowers. And 1071 is really about the race, ethnicity, sexual orientation status of the owner. So it is it seems that maybe groups will be commenting on this idea may be opposing this idea. Thanks, Kevin.
Speaker 1 38:32
We’re now on the final stretch. Before we go into q&a. I did want to close though, by discussing some of the attempts to repeal 1071. House Republicans have introduced HJ res 50 That would repeal 1071. And a lawsuit has been filed by the Texas Bankers Association and REO bank. Before we get into this, I do just want to say we do not anticipate that HJ res 50 will succeed. It’s also you know, increasingly hard to predict the courts these days, but we also think the chances are good that the lawsuit filed by the Texas Bankers Association will not succeed. However, we do need to be vigilant about these sorts of attempts to take back this progress and moving forward with getting small business lending data into the 21st century. And so we’re just want to take a little bit of time to go through sort of the three main arguments. Definitely, these are definitely the three main arguments of the lawsuit. And you might hear some critiques of 1071 Along these lines, so we’re just gonna spend a little bit of time walking walking through these. The first you know, argument you’ll hear a lot is the CMBS funding structures unconstitutional. You’ll hear the CFPB dramatically in irresponsibly increase the number of data points we’ll get into it but not true. And then also the cost to lenders will be high particularly for smaller lenders. We also don’t anticipate that to be true. So starting in order, the Supreme Court will ultimately decide on the funding structure of the CFPB. But we’re hopeful that to see if the court will find that the court structures constitutional, just as the Second Circuit Court has. And as a there’s an amicus brief this week with 144, current and former members of Congress, where they’re all saying that the CFPB is funding structure is clearly constitutional. And they’re saying this because many public agencies are funded outside the annual appropriations process, as as the CFPB is the CFPB receives some money from receives its funding from the Federal Reserve, and it is capped on how much it can receive in the Federal Reserve. Without going through another process that’s captured 12%. These agencies, these other agencies that have similar funding structures include the other federal financial regulators, Federal Reserve, OCC, FDIC, that are responsible for administering the CRA. So people are familiar with so you’re very familiar with those regulators, their their, their funding structure is very, very similar. They don’t have they’re not part of the annual appropriations process either. There’s also many state financial regulators that have similar processes. And there’s reasons for this is because Congress has consistently assigned significant responsibility over consumer laws to agencies outside the annual appropriations process in order to ensure budgetary stability. As you can see, these are agencies that are working on very complex and long term regulatory initiatives, such as section 1071. You know, with this dream, it is hard to predict the Supreme Court these days, as we all know, but if the Supreme Court would, you know, largely decide and see if PVS, putting circa was unconstitutional, it would really call into question a lot of other agencies, and I don’t think anyone wants that degree of uncertainty, because the laws would still be on the books, Dodd Frank would still be on the books, it’s just the steps that the regulators have taken to interpret and implement those laws would now be called into question. That’s a good high amount of uncertainty that that that would create. And so we’re very hopeful that the CFPB, will, we all would stand that kind of attack, and because it is, you know, a widely used funding structure. Moving on to the other point, the point that, you know, the the CFPB, just, you know, started adding all these data points. The lawsuit mentions multiple times that the CFPB went from 13 to 81 data points, where did they get that 81 figure, they got it from a chart that the CFPB put out, winked right there. The final, as we mentioned earlier, the federal rule really only requires 20 main data points. But some of these are a little complicated and have multiple sub components. And that chart, let’s see, if we did, it was the CFPB thorough job of trying to show to lenders like, here’s all the different data points. But in practice, though, a lot of these aren’t, it’s not like each of these points is going to cause a significant amount of additional costs. For example, collecting race and ethnicity. Everyone agrees it adds to do that, that was part of it. 1071, that was not added by the CFPB. There’s 37 different data points that 81 are just on the race and ethnicity, because you’re disaggregated, there’s a lot of different things in play there. So that is, that is 45% of those 81 data points that get mentioned frequently in the lawsuit of the 81 data points, you know, we’ve gone and looked at them, we would we would argue that 57 or 70%, or sorry, 57, or 70% were required, and only 24 or 30% were added by the CFPB is discretionary authority. Furthermore, we would say that 14 of those 24 data points added by the CFPB. Were for pricing information, as we discussed earlier, that is critical information for assessing how business needs are being met and detecting for possible lending issues. So we absolutely needed those data points and it was reasonable at the CFPB to to add them finally costs when you read the if anyone does but want to read the the Texas bankers complaints about 20 Page complaint. The meeting not very long term, study how these things usually are. You’ll find a lot of discussion about costs. And sometimes you’ll see some other critiques of say what is it’s too expensive. A lot it’s almost every time you’re going to hear someone talking about cost, you’re not going to hear them talk about the income that lenders generate from making loans, which remember that’s that’s why they do it. Lenders make loans to gender Rate money. And the CFPB created estimates of cost and income for loans for three categories of depository lenders based on the numbers of loans they originate. Some people have criticized that the cost estimates that see if you came up with, but the CFPB did double the cost estimates, the hiring, sorry, the training, they doubled the training hours. And they also increased the cost estimates by assuming that, you know, businesses may have to hire a full time employee. So the CFPB did response to industry feedback, increase their cost estimates, they did not do increase the income statements because no one challenged, there hasn’t been any challenge to the net income estimates, the CFPB put out in the notice of proposed rulemaking and again, in the final rule, and if you go and you take, and they came up with those estimates for three different categories of banks, basically based on how many loans they originate. And if you go and you take the the minimum ranges, because they presented as a range of the minimum ranges of net income for the origination and you apply that per the number of loans that they would make to be in those categories, you basically get that this comes out 2.1 2.9% of annual income from originations of small business loans. That is point one 2.9% As a small cost to pay to get small business lending data to the 20th century. And also, after the one time costs, these estimated cost drops to this point, Oh, 06 2.4%. Here’s some charts that get at this. We’ll be sending all this out. So don’t feel you have to screenshot yet or take copious notes. The lawsuit did also say that, you know, we don’t agree with these costs, we think the costs are gonna be much higher $100,000. All right, even $100,000, we’re talking about point seven 5% of the net income of what in one year from originating small business loans. So the cost argument here does not really make sense when you think about the entire picture. And you think about how much income the banks generate from the lenders generated from making these loans.
Speaker 1 47:15
One, so, thought slide here, we were going to one last thing I’ll say before we move into q&a, we’re going to be sending out a 1071 support sign on letter. We want to send this letter to the House Financial Services Committee. Before they start, mark the markup of H. J Rs 50, which is was the it’s a legislation that was introduced to repeal 1071. Again, we we want you to sign on to this and show your support. We don’t anticipate that echeverias video will be successful. But we do want to show you know strong community showing and show you know our allies and Congress that they are on firm ground, to say that, you know the community needs this data and community wants this data. My colleague, Joe Reed will be sending out the sign on letter. Shortly after this, after the conclusion of this webinar, please review the letter. It’s short, I think it’s like four or five pages. That’s short. But please review it, sign on. And please do that as soon as you can, because we want to send this you know before they do markup, which could be as soon as as next week or the week after. So please do sign onto that. It’s very important, because we want to show support pretend 71 And also consider reaching out to your local congressional office as well to discuss the importance of 1071 data. And feel free to contact me if you wanted more information on doing that. All right. That was a lot. We have about nine minutes left. I’m going to start taking some questions. So let’s quickly look at some again you can submit questions in the q&a tool.
Speaker 1 49:22
Okay, sorry if I mispronounce names, Pooja Netta. The marigold effect asked, How can small business advisors who work with underrepresented founders best use this information to advocate for more equity and lending now? Beverly, you’ve covered that a bit. Do you want to take that question?
Speaker 2 49:45
Sure. I mean, I now is a bit of a question mark because it’s going to take a while for us to get the data through 1071. But I know that you know in the work that we do, what can we can start doing you is working with communities where there’s a need for more equitable lending in small business and and find out what their needs are. Talk to people about the fact that they’re going to be asked different questions when they apply for loans so that people understand why those questions are being asked. That’s something that there is some concern about how people are going to react to the questions. So I think educating the community about 1071. And its its purpose, and what’s in it, and what what the banks are going to start asking people in terms of all the facts, the data points that we went over. So that’s important, but also in terms of working with the banks to make sure that they understand how to reach out to the communities, you know, where they should be lending, to find out what the needs are, but also to help communicate to potential small business owners what 1071 is about, and that they will be asking new questions.
Unknown Speaker 51:06
Thanks, Kevin, anything you want to add to that?
Speaker 3 51:08
Well, just and this is a broader message, like for now, it’s defending that is defending the rule and defending the CFPB. So and I know NCRC members are going to do it. To the extent there are people on the call maybe I don’t know, if the questioner is an NCRC. member, I know their financial institutions on the call. There were a lot of institutions and organizations that have made recent commitments to racial justice and express concern about closing the racial wealth gap and gender wealth gaps and related wealth gaps. Well, 10, seven, this is it, this is 1071 is an is a major way to work towards that. And it is really important for everyone to kind of see as these attacks persists. And you know, hopefully Kevin’s right, like where it will come out on top. But we need to be vigilant about it, and especially those who are kind of on the industry side of things. It is important for you and your org, your organizations and your trade associations, to not oppose and to ideally support the CFPB is constitutionality and its existence and this rulemaking, and we’re and I will just say we’re really disappointed to see the time to that is not happening. So that is that is the thing to do in the short term.
Speaker 2 52:30
Yeah, Kevin, can I just add that, you know, recently, the just the other day, the Senate submitted an amicus brief in support of the CFPB. And that was one of the things that we did on the ground and was dirt in New Jersey was to advocate to make sure that our senators were actively were were signed on to that amicus brief, and I believe there will be more opportunities like that. So thank you, Kevin, for bringing that up. Because we you can reach out to leadership and publicly speak out about the importance of protecting the CFPB. Thank you.
Speaker 1 53:04
Question from Lacey Lent. What is happening with small farms is tends to everyone including them? Yes, yes, they are. And in fact, one of the data points added by by the CFPB was NAICS code. And so that can be used to identify if it’s a, like an agricultural business or not. Oh, sorry, again, if I if I mispronounced what’s the SAR cash from the Small Business Majority? Can you expand on the factoring rule? Kevin, I know you’re particularly interested in this, do you want to do you want to feel this one,
Speaker 3 53:46
I will try and shout out to the Small Business Majority, which does great work and has really supported this all these efforts very strongly and other efforts. So factoring didn’t make it in and I know, maybe Small Business Majority. I know, a few of our members really wanted to see factoring included. And I think the CFPB determined they could not include it because it did not meet their definition of a loan. And I may have that wrong. One thing that I can say I saw a few of the comments were raising similar concerns about data points of particular interest that weren’t included in the final rule that we didn’t get that we’re kind of a loss from a small business consumer advocacy standpoint, the CFPB rule is really long, in part because it includes the CFPB discussion of its decision. So there is a discussion on factoring, what was proposed all the comments that were received, and the CFPB is thinking. So it was it was so long, it’s a lot of pages and I’m not sure if I’m remembering exactly, but I think on factoring the CFPB determine that it really did not fit the definition of a loan. And again, I might be mistaken there. But people can look and find these discussions in the rule. And I guess I know that, you know, CFPB did seem to approach this very thoughtfully. We didn’t get everything we wanted. There were a lot of like, big disappointments. But it did consider all the comments, and there is this discussion, and I think they they really gave it, you know, the serious thought that it required.
Speaker 1 55:33
You, Kevin, Victoria Stein had a question, concerns about 100 loan threshold VOB CRA was confusing. Are there a lot of large banks that would be excluded at this level of lending? Perhaps I misunderstood you? So let me clear that up. Victoria. Sorry, that was a little unclear. In part of the reasons I’m curious, because it is hard to exactly evaluate how it’s gonna play out. Because, you know, we are thinking of ways that we could kind of better kind of anticipate which lenders would be, you know, likely to cover the Wunderland threshold and which ones aren’t? It’s very easy to find the large, you know, the banks that are doing well, more than 100. Like, it’s easy to tell, but it is kind of harder to determine right now. Exactly which specific bank, smaller island or small islanders will be covered and which ones won’t. And that’s because partly, so it’s the series, the data we have now on small business lending from CRA, will tell us, you know, these are loans that were a million dollars or less, and went to either a business that was making a million dollars or less in revenue, or a business that was in a load more income census tract. And that’s it. Really, that’s really the vast majority of CRA small business data. Now, remember, the hunter loan threshold, you know that their definition of a small business is businesses that make $5 million and up. So it’s, it’s we, we could put together some stuff based on the 1 million threshold. But that is that’s intentionally, that would be excluding a lot of stuff. Because the 1071 rule defines a small business as higher, it goes up to 5 million. And we currently don’t have CRA data on that. So so there is a question here about, you know, what, how many large banks which are roughly banks that are at 1.4 billion, it’s a little less than that, but it gets, it gets adjusted for inflation, but it’s basically no currently large banks that are around 1.4 billion up and assets, they have to do their that the CRA doesn’t say, to have the, you know, 1 million or less, or the global census tracts, it’s hard to to, to really determine exactly how many of those banks, you know, may not have to follow 1071, because they’re doing, you know, 100 loans or less on small business. It’s just it’s kind of a different definitions here. Or we’re not exactly sure how it’s going to play out because of the because of the data issues. And I think this really just gets at this is why we need better data, because it’s affecting, you know, our ability to just set up strong programs and things like that. But the big takeaway, you know, still is higher than threshold, they need to get revised. But we’re still going to have a much better sense of small business lending data going forward than we have now. And you’ll hum to the homeworks GoJek we have today is was not the homework exposure Act has passed. So there is opportunities, you know, as data comes out for GM, as these examples become more telling and clearer for us to make adjustments through advocacy and all that good stuff. Governor Beverly any, we should actually do we are at time, I want to be mindful of all of your schedules. I guess that would basically be my closing statements. Beverly or Kevin, do you want to take a minute each to do a closing statement?
Speaker 2 59:15
Sure, I’ll let Kevin wrap up in the end. But I’ll just say that, you know, the symptoms of what happens when you don’t have fair and equitable, small business lending are clear. We see whole communities in cities that don’t have that have insufficient or no Mainstreet Small Business quarters at all. We see pops whole populations denied the benefit of financial stability and generational wealth building that comes from small business ownership. We see entire cities and towns and counties that can’t meet the service needs for their citizens because they don’t have the tax revenues that come from small businesses. 1071 will allow us to go deeper go underneath the symptoms with the data that we’re going to have to diagnose the real causes of the symptoms I just described. And we hope that it will help us attack and end discrimination and redlining and small business lending. And we hope that it will create a truly more equitable and fair small business lending, culture and environment. But we, we need to work the data, we’ll get it. And it’s going to take all of us to make 710 71. This is significant and historic, advanced, it shouldn’t be in the world of small business lending. And I’ll just leave it there.
Speaker 3 1:00:45
And I will agree with all that we, you know, we didn’t even manage to talk about how businesses are struggling today. And over the last few years with the pandemic, I think everybody’s, you know, rather aware and conscious of the disparities in terms of who was impacted by the pandemic, how small businesses were impacted, the workers who are impacted, as in a lot of our work, that disproportionality are painfully clear. 1071 is a solution. It’s not a perfect solution. Let’s fight for it in the short term, let’s use it when the data comes out. All of this takes a long time, you know, many years for Honda many years for 1071. Get engaged, get engaged with NCRC getting engaged with any local advocacy organizations on this issue, and more broadly for the benefit of small businesses, residents, institutions and our local communities. And thanks again to NCRC for kind of pulling us all together on this. And for really pushing forward that 1071 rule.
Speaker 2 1:01:50
Yeah, I just like to say thank you, I would like particularly to say thank you, and CRC and CRC for the incredible work that you did to get to 1071 finally out, and yeah, so just want to thank you and all the advocates who worked on it, and let’s fight to save the CFPB
Speaker 1 1:02:08
Thank you very much, Beverly and Kevin, and thank you all. Lots of good questions that we couldn’t quite get to you. Feel free to email me. And you know, we want to talk more about this Cahill at Interior c.org Please be on the lookout for our sign support 1071 sign on letter B coming from my colleague Joe read. I’m sure many of you know him. But please sign on to that letter because we want to send it to the House Financial Services Committee before they start markup of h h j res 50. But thanks again, I believe there’s a survey link in the chat are like to weigh in on how we did here today. But really appreciate all the people that came here and look forward to continue to work with you. So thanks again everybody. And with that, have a have a good rest of your day.
Transcribed by https://otter.ai
