The case for discretion in small business lending
As Congress debates the proper role of and potential limitations for the Consumer Financial Protection Bureau (CFPB), the agency is busily crafting new rules to require financial institutions to collect and report data in increasing, and potentially counter-productive, detail.
As any small business owner or blooming entrepreneur knows, there is no one-size-fits-all approach to obtaining the financial resources needed to start a business. When an entrepreneur has a new idea, the process of generating the financial backing to move forward is very different, depending on their financial picture. The infamous Dodd-Frank Act included a small provision that has gone mostly unnoticed until now. It directs the CFPB to start collecting data from banks to track small business loan applications and approvals to ensure credit is being extended to women and minorities. As well-intentioned as the effort may be, New Hampshire’s community banks worry that overly aggressive rules in this area could harm the very individuals our government is trying to help.
The beauty of small business lending in the Granite State is relationship banking. The local lender sits down and evaluates the business model, financial picture, management expertise and individual’s drive to succeed. This is not a one-size-fits-all, check-the-box process. The CFPB’s effort to collect data is one step toward limiting the discretion lenders use — out of fear the agency will come down on them when they have taken a chance on one customer but not another. This will take the “relationship” right out of relationship banking.
In a state where privacy is a highly valued commodity, this Washington approach will undoubtedly not sit well. Business owners will likely be required to reveal even more information about themselves than they do now. Disclosure is unlikely to be limited to one individual, but would include anyone considered an owner. This is especially problematic in the case of LLCs, or other businesses where multiple parties would be required to disclose even more information to their banker than they do today.
There are serious concerns about the privacy of individuals, in especially small communities “where everybody knows your name.” Financial privacy may be in jeopardy if the data collection and reporting is not designed correctly.
I was pleased to have an opportunity to meet with several key staff members of the CFPB last month to express the concerns of bankers in our home state. The word is that they want to listen to banks and their customers, and to learn from them, but it’s too soon to tell how that will impact agency decisions on new rules.
Meanwhile, bankers in our state will continue to press for smart regulation that will ensure the relationship banking New Hampshire’s businesses rely on and love will not be deterred by Washington rules. There will be opportunities for New Hampshire’s congressional delegation to push back as this process moves forward. We urge them to support public policy that will not limit a lender’s ability to use discretion out of concern for reports filed at federal agencies in Washington.
Christiana Thornton is president and CEO of the NH Bankers Association.