By Ray Birch
ARLINGTON, Va.—Some credit unions may want to add an application fee for small business loans if a proposed regulation from the CFPB is an onerous as some think it will be when it is finalized.
NAFCU said such a pricing decision may be necessary, adding that without the charge the flow of member business loans into credit unions could slow.
That’s the outlook of Andrew Morris, NAFCU’s senior counsel for research and policy, who said adding a fee for small business loans would be the most likely step credit unions would take in the wake of a new CFPB proposal. A recent NAFCU study found most credit unions expect to charge higher fees on certain business products and credit products to manage compliance costs incurred if the CFPB’s Small Business Regulatory Enforcement Fairness Act (SBREFA) outline of proposals related to Section 1071 of the Dodd-Frank Act is finalized.
Additional Compliance Costs
Section 1071 requires financial institutions to collect certain data regarding applications for credit for women-owned, minority-owned, and small businesses, and to report that data to the Bureau on an annual basis.
“It makes sense that an application fee would be added,” said Morris. “That would be in response to the additional compliance costs from this. I think credit unions don't want to charge fees, and will do everything in their power to make small business credit as widely accessible as possible. But at the end of the day if the loan officer is working more hours…”
Morris pointed out the CFPB proposal, as it currently stands, would require CUs to collect 16 extra borrower data points and verify them.
“That's more time, and the credit union has to be able to pay for that,” Morris said. “It's just a question of is this tool going to be very onerous in its final form. Credit unions don't want to have to resort to charging a new fee, but the reality is that when you introduce this magnitude of data collection you can't get around the fact that more time is going to be spent on those compliance activities and you got to pay for it somehow.”
Another Option
Morris said some credit unions may respond by leaving pricing unchanged, or consider another option.
“They could go with slower approval times, but again that comes with an opportunity cost,” stated Morris. “If you're too slow turning around these lending applications the borrower might decide this is taking too long and go somewhere else. If you don't have a good, efficient process, which again will probably cost money, you could be losing money by missing out on loans. And that's just as bad.”
Morris said the CFPB proposal is “conceptually similar” to the Home Mortgage Disclosure Act (HMDA) in terms of the way it would work, and in the types of data elements the Bureau would be seeking.
“This is one of the things where conceptually it would be great to have data on small business lending to identify small business credit opportunities,” suggested Morris. “But it's really the mechanics and logistics of getting that data, and potentially verifying it, that create costs and burdens to institutions like credit unions, particularly ones that are very small.”
Comments are Due
Morris said comments are due to the CFPB on the outline of the proposal in December.
Andrew Morris
“Which means, realistically, it will probably be sometime next year that we see any activity around a formal notice a proposed rulemaking,” Morris said. “Then, following that, the CFPB would have to review comments again…And if you go by what the Bureau is saying, right now they're contemplating an implementation period of about two years after publication of the final rule in the Federal Register.”
Morris emphasized there is still a great deal of time for the agency to adjust the proposal, saying changes could be help credit unions or hurt them.
“It somewhat depends on how the Bureau interprets comments and data it receives during this initial outreach and some of the assumptions they're making could change,” he said. “This could be less favorable or more favorable to credit unions.”
‘Reasonable and Good, But…’
Morris said the legislative purpose of the proposal is reasonable and good.
“It's just that the mechanics of collecting all this data is going to create real compliance burdens for credit unions,” he said. “I think it's really about tailoring the scope of this rule so it doesn't have the opposite effect—you don't want to chill lending by promoting a rule with so many compliance burdens that it just doesn't make economic sense for the financial institution to offer the product.”