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Hello, and welcome to the Curinos (F)insights podcast. Today we will be speaking with Lindsay Burkhalter, director Small Business Solutions here at Curinos about the new CFPB rule around Section 1071 of the Dodd-Frank Act that amends the Equal Credit Opportunity Act to apply to small business credit. Implementing 1071 means the majority of lending institutions will be required to aggregate and submit certain data about small business credit applications to the CFPB. Welcome back to the podcast, Lindsay.
So happy to be back with you, Rutger. Thank you for having me, and so happy to talk about 1071 today. Really excited.
Now, how did I do in that overview of section 1071? Was there anything that you would like to add to that basic description of what 1071 is before we start getting more into the particulars of what it means for banks?
I think you covered it from a textbook definition perspective. It just basically outlines the high level view of what the rule is going to potentially require. Another way that I like to look at this is it’s just HMDA for small business credit. For those of our listeners that are familiar with HMDA on the equity side of the house, it’s very similar to that, but only for small business credit applications. Definitely a good comparison there.
The other thing too, I think we want to make sure we cover is that not only does it make sense and it’s extremely valuable to focus on how we’re going to be uploading the data to the CFPB, which I think the majority of institutions are focusing on now, but it’s also equally, if not more important, to focus on the proactive nature of your analysis as it relates to 1071, meaning how are you today understanding what your lending policy dictates in terms of production trends, pricing, all those fun things. What can you do based on what you’re seeing in those trends to mitigate potential 1071 concerns now as opposed to later next year once the rule becomes effective?
Now, generally speaking, what does the CFPB hope to achieve with 1071, and what issue is it intended to address when it comes into effect?
I mean, it’s pretty simple – fair and equitable lending practices across small business clients, whether it is women-owned businesses, whether it is minority populations concentrated in a certain CBSA or MSA, LGBTQI+ populations. How are financial institutions’ lending policies across those different groups, and are we lending fairly and equitably? That’s it. Bottom line.
What data will banks be required to submit under 1071?
On the data side, there’s what I’ve bucketed into three different categories. There’s financial institution data, so that’s just your information about yourself as a lender, which could be anything from an identifier, what the dates of the application are, how it was taken, who the recipient was, what the decision was, what the decision date was.
Then there is credit information. That’s your typical, what kind of product is it? Is it a loan, a line of credit, credit card? Is it an SBA product? How much is the application for? What’s the gross annual revenue of that client? Business segment, NAICS code, employees, time in business, number of owners, all of those different kind of business demographics there as well.
And then the third section is really more in the minority demographics piece, so reflecting if this is a minority owned business, is it LGBTQI+, women-owned? What is the principal owners’ ethnicity, race, and gender? Those are just a high level overview of the three different buckets or categories in which the CFPB is going to look for data.
Now, when we look at the findings from the Fed’s 2022 Small Business Credit Survey of nearly 8,000 companies across the United States, we can clearly see there is disparate impact when looking at the share of applicants that were fully approved for small business loans and lines of credit if we looked at that by race and ethnicity of the owner. How will 1071 and tracking the data help to change this?
I look at this study, and for those of our listeners that haven’t seen it, I encourage them to do a quick Google search and check it out. It’s like a precursor to 1071, just a high level analysis overview that basically shows that there is disparate impact as it relates to small business lending across minority populations.
We saw in the results in that study that we’re seeing a different approval rate as it relates to the White population versus Hispanics versus Asians versus Black owners, and that is absolutely going to translate into the 1071 findings, so a precursor to more of what 1071 will likely uncover.
Being in the data business here at Curinos and running a small business lending consortium with many large banks, we know the significant effort involved in extracting data and creating an ongoing data feed. What are banks you work with saying about the availability of the data that CFPB wants, and the effort and expense required to extract and compile it?
Rutger, it really depends on who we’re talking to. We have had a number of conversations with a number of either clients or prospective clients in this regard over the last couple of months, really just to gauge where they are with 1071 efforts overall. As I said, there’s really two pieces of it. It’s the data piece, which you’re asking about, and then the proactive analysis piece.
On the data front, we have clients or potential clients that are really already complying. To explain that more, if you are a financial institution chartered in New York state, there was a rule from the Department of Financial Services in New York state that says you need to start to comply with the majority of this now. I always mention my friends at M&T, they’re technically already sending data. It’s a bit different than what the CFPB is asking, but a lot of it is duplicative. They’re on one end of the spectrum.
And then on the other end of the spectrum, you have folks that are really not where they need to be as it relates to this. I mean, we have clients or potential clients that don’t even know that they have full exposure or visibility into all the small business credit applications that are currently being taken.
That’s a bit scary. Some of those applications are taken by, believe it or not, word of mouth. How do you get a handle on those kinds of situations, which you’re going to have to report on to the CFPB. To respond to your question, it’s just really across the board.
Based on the data currently available in the Small Business Lending Consortium supplemented by additional available demographic data, what have you observed with regards to this disparate impacts? How are we at Curinos helping lenders understand their position and make changes ahead of this rule change?
As I mentioned earlier, we are already working on this with our clients – clients that are current participants in our LendersBenchmark for Small Business Lending Originations Consortium. That number is 13 lenders today, which equate to approximately 40% of the market. We’ve got your top three big banks, we’ve got a lot of the top 10.
What I can say is that this disparate impact as we start to do preliminary analysis for our clients is largely present. It’s just only reinforcing what we were just speaking about, the Small Business Credit Survey, and also reinforces the need for this proactive analysis as well as more digging into it.
A couple quick examples. We are seeing in a number of areas that have high minority population, so we can slice or dice it by CBSA, MSA, zip code, so depending on the variables that make the most sense for your FI, we’re seeing very similar to that Fed study that approval rates are lower in certain areas, approval-to-book rates are lower, pricing is higher, and market share is lower compared to branch share.
Those are just some high level findings, statistics that we’ve seen that really do prove out that that disparate impact is there. But again, the great thing is we’re doing it now so you can make changes to policy so that that won’t be the case once the rule goes into effect.
Now, will this 1071 data, when it becomes available for the regulator, be part of the Small Business Lending Consortium? How will this comparative view of the data help lenders making changes to their lending practices?
Our goal is yes. As a participant of LB for Small Business Lending Originations, on the roadmap for next year is we will incorporate these 1071 data metrics into the actual consortium data for participants to see in an anonymized fashion. Our consortium in general is anonymized, so there’s no risk of your specific lending practice or volumes or anything like that being discovered. We make sure of that.
This would also be a similar case where we put in the minority information, we put in the women-owned information, we put in LGBTQI+ information. We overlay that with the data of the market and the peers that participate in the consortium, and we provide not only current insights, but then those insights can be used in a proactive nature.
If I’m lender ABC and I participate in the consortium and I decide that I’m going to move forward and partner with Curinos on this effort, what I will see in 2024 is that actual minority data come through the system so that I can make some analytics and make some decisions myself. It’s really a self-serve tool that we will continue to work through and promote, including those really important 1071 data metrics.
In August, a federal judge in Texas put a stay on implementing 1071 while a different case involving the CFPB case is decided next year, this takes the immediate pressure off banks, but I’m guessing they shouldn’t relax too much. How should banks be taking advantage of this extra time that they’ve been given to get ready for 1071?
I would not look at it as it even takes off the immediate pressure. Yeah, there’s a stay. Most organizations, depending on the amount of covered credit transactions that they originate, under the original rule would need to comply as of October 1, 2024. There are other tiers below that that are subsets of that that have later implementation dates.
But I would look at this Texas stay as a gift. It gives you more time – probably an additional five to seven months to get your arms around the data submission as well as, and almost more importantly, the proactive analytics that you should be conducting now. Long story short, do not relax because of that stay. Just be more proactive instead.
Now, Lindsay, as part of your role where you’re speaking with many small business lenders in the market, what have you heard about who has started gathering data and what challenges are they facing? What would you say to lenders who haven’t yet started gathering the data to get ready for this regulatory rule change?
Our focus has not been as much on the data collection and gathering as it has been the proactive analytics that we should be seeing here. On the data collection side, what I have heard is there’s so much. The CFPB’s final ruling is obviously not as interpretive as you’d like. It leaves a lot open for question or conversation, but more so for those organizations that don’t have a solid small business credit process from application all the way through approval to booking, including the applicable reporting that they should be looking at, those are the ones that are going to be really behind the eight-ball as it relates to the data piece.
Now, conversely, on the proactive nature analytics piece, no one’s doing that and that’s because they don’t have access to the market as a point of comparison. That’s where we come in. If you think about a solo lender today, they’re able to do an individual analysis on their performance. They can take their small business lending metrics, they can overlay publicly available demographic or census info, and they can make some assumptions.
But what they don’t have, which is the critical piece, is how this compares to the rest of the market. That’s where we come in. Hopefully we’ll be able to help our clients, they’ll reach out to us, we’ll talk about how we can best serve them in this respect.
Now, if you haven’t started this, whether it’s the data piece or the proactive analytics piece, don’t procrastinate, start now. Just because of that Texas stay does not mean we can sit back on our heels and focus on some other things for a while. This is a big deal. We don’t want folks to be in the article of a newspaper outlining potential areas of concern that the CFPB found. So we want to make sure we’re helping all of our clients to the best of their ability mitigate potential 1071 concerns.
Start looking into the data even if the deadline is not here yet. Thank you very much for your insights into this new rule. Where can people find you when they have more questions and when they want to join the Small Business Lending Consortium?
Thanks. I welcome the opportunity to chat with folks about this more at a more detailed level. We actually just did a Curinos webinar on 1071. That will be available on our website if it’s not already. I encourage folks to listen to that.
But in addition, if you’d like to contact me directly, my email address is firstname.lastname@example.org. Would love to chat with you and hear more about your concerns and how Curinos can help.
Great. Well, thank you very much for being on the podcast. This information that Lindsay mentioned will also be available in the show notes as well as a link to the webinar.
As always, thank you to our Curinos (F)insights team. Terry Badger is our director of thought leadership. Editing and production by our senior designer Adrienne Cohen. Music is by Vision Studios. I’m your host, Rutger van Faassen. You can find more insights at curinos.com. Please subscribe and review wherever you listen to podcasts.