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How Increased Banking Regulations Undercut Federal Pretense At Helping Small Businesses


The Dodd-Frank-created Consumer Financial Protection Bureau (CFPB) recently announced it is launching an inquiry apparently designed to pinpoint problems with small businesses getting access to credit.

This sounds like a noble undertaking, particularly with CFPB’s evident interest in especially identifying hurdles to women- and minority-owned businesses borrowing what they need to operate and expand. However, the CFPB is doing plenty that will likely limit the availability of credit for those same small businesses it ostensibly seeks to help—a shining example of how government growth and increased regulation can harm those that it supposedly aims to raise up.

Admittedly, there does appear to be a problem with small businesses getting access to credit. As recently noted by Rep. Rob Pittenger (R-NC), Federal Deposit Insurance Corporation data indicates that loans to small businesses have declined 1.5 percent in the period since the onset of the financial crisis, with commercial loans of less than $1 million declining close to 15 percent.

On the one hand, this may indicate more cautious borrowing trends from small businesses (not necessarily a bad thing); on the other, in a period where credit has generally been cheap, it hints some businesses that would naturally seek credit are either declining to do so, or failing to obtain it.

But one reason they may not be getting loans they’re seeking could well be Dodd-Frank itself: Banking-sector employees and trade groups routinely complain of the need to allocate staffing resources to compliance as opposed to commerce—form-filling instead of loan-making. If you’re a budding entrepreneur or a small mom-and-pop operation, that’s a problem.

We’re the Government, and We’re Here to Help

This is what the Independent Community Bankers of America (ICBA) appear to hint at in their statement opposing the CFPB’s move. Their CEO says “The CFPB’s data-collection and -reporting mandates will compound existing regulatory and paperwork burdens, to the detriment of economic and job growth.” According to Pittenger, “Local bank leaders tell me they now hire more compliance officers than loan officers, as filling out forms for bureaucrats has become more important than growing the economy.”

This trend would presumably be worsened by CFPB’s current endeavor, not just because it requires collecting and submitting massive amounts of data (which also raises privacy concerns), but because of the lack of a standardized definition of “small business loan.” Robb Mandelbaum discusses this at Forbes, which cites ICBA’s CEO as saying “[CFPB doesn’t] even know how to define what a small business loan is. And unlike mortgage lending, where there’s a very discrete set of products, every small business loan is unique.”

Mandelbaum goes on to cite Kent Franzen, a self-described banker from Nebraska, who notes the less-than-crystal-clear method of ascertaining whether a loan is one for business. Franzen wrote to CFPB Director Richard Cordray, “For every bank I have worked in it is purely a loan purpose test… Is the purpose of the loan to generate or support the production of income? If the answer is yes it is a small business loan, answer no and it is a consumer purpose loan.”

That being the case, it’s bound to be tricky for lenders to figure out which loans definitively belong in the “small business” category to report data to CFPB, a sentiment the American Bankers Association has also expressed. That means spending a lot more time on compliance, reporting, and meeting regulatory burdens. Again, allocating more staff time and money to compliance means less staff time and money devoted to extending credit—the thing CFPB is ostensibly worried about here.

This Hurts the Little Guys Most

This may be a lesser concern for big banks, but for credit unions and community banks that have to contend with much of the same regulatory load as the big dogs, the concern looms large.

According to Pittenger, 2016 saw just two new commercial banks launch. He says 228 were launched in the year before the recession; FDIC data shows an average of 100 a year or more pre-crisis. Between 2010 and 2015, just three new banks launched. The National Association of Federal Credit Unions says mounting compliance burdens, thanks to the CFPB and Dodd-Frank, have resulted in more credit unions and similar financial institutions closing.

This matters, because if small businesses really are struggling to get credit, fewer banking options likely makes that struggle more intense. More specifically, if the CFPB’s hinting that women- and minority-owned businesses struggle even harder to get credit because of discrimination, that problem is unlikely to be addressed by fewer banks and credit unions existing, and the options for “shopping around” diminishing—a trend that CFPB’s current regulatory data gathering and regulatory thrust could compound.

Admittedly, not 100 percent of the blame for the decline in banking—and with it, financing options from conventional lenders—has to do with Dodd-Frank, let alone the CFPB. When interest rates are low, banking is a less attractive business to be in because the profit margins decline. Moreover, consumers now have options for obtaining credit beyond the traditional bank or credit union. A female small business owner myself, I’ve lent to American women raising money on Kiva to finance their small businesses.

Other small business owners have opted for other, non-charity peer-to-peer or online lenders. But of course, that presents a challenge, too. The CFPB has moved to crack down on online lending, including peer-to-peer, as have individual states (disclosure: I’ve worked on efforts to combat such crackdowns).

Some of us are, of course, lucky enough to run small businesses that are non-capital-intensive—and a de facto choice between existing commercial bank behemoths with which to store our cash and through which to process our payroll is only occasionally annoying, as opposed to legitimately problematic in curtailing our ability to trade in more stock, hire more employees, or simply manage ingoings and outgoings with less worry.

But one American, female entrepreneur I’ve lent to, who has a labor and stock-intensive business, says it’s hard to see that what CFPB is attempting here will clearly improve her bank-based financing options, and easy to see that it could contribute to a climate that has in practice limited them. Luckily, Kiva loans seem to be working for her, and long may that trend last.