Former Head of The SBA Suggests CFPB Oversight

Karen Mills, who served as head of the U.S. Small Business Administration from April 2009 to September 2013 made a startling suggestion in a recent educational working paper. In The State of Small Business Lending: Credit Access during the Recovery and How Technology May Change the Game, she proposes alternative business lenders be subject to rules created by the Consumer Financial Protection Bureau:

Who should be the federal regulator? The status quo consists of overlapping regulatory oversight. Should borrower and lender protections be consolidated under a single federal regulator and, if so, which regulator is best equipped to perform this role? In the online small business lending market, the newly created Consumer Financial Protection Bureau (CFPB) may be the most likely to oversee this market. This regulator has authority to oversee payday lenders and similar entities that loan to consumers, and is bringing greater transparency for borrowers to credit card and mortgage markets. In addition, CFPB is charged with data collection on small business loans required in Section 1071 (704b) of Dodd‐Frank. But, the agency’s plate seems full right now with writing and implementing a significant backlog of rules for consumer credit markets from Dodd‐Frank. Given the hybrid nature of the P2P model, we should consider whether or not a hybrid oversight model between federal banking and securities regulators makes the most sense as protecting lenders through securities regulation may lack flexibility and impose inefficient burdens on firms.

Bloomberg writer Pat Clark used the working paper as the basis for his latest story, Expensive Small Business Lenders Are Unregulated. Should They Be? He believes the debate over regulation is likely to heat up. The twice cited basis for possible CFPB jurisdiction relates to the Dodd-Frank amendment to The Equal Credit Opportunity Credit Act, which merely updates language to an old law about data collection.

It starts as follows:

(a) The purpose of this section is to facilitate enforcement of fair lending laws and enable communities, govern- mental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.

(b) INFORMATION GATHERING
Subject to the requirements of this section, in the case of any application to a financial institution for credit for women-owned, minority-owned, or small business, the financial institution shall (1) inquire whether the business is a women-owned, minority-owned, or small business, without regard to whether such application is received in person, by mail, by telephone, by electronic mail or other form of electronic transmission, or by any other means, and whether or not such application is in response to a solicitation by the financial institution; and (2) maintain a record of the responses to such inquiry, separate from the application and accompanying information.

(c) RIGHT TO REFUSE
Any applicant for credit may refuse to provide any information requested pursuant to subsection (b) in connection with any application for credit.

There is no basis for rule making outside of how these lenders collect data.

You can read Karen Mills’ full working paper here: http://www.hbs.edu/faculty/Pages/download.aspx?name=15-004.pdf