There are two major problems with fair lending and commercial loans, but lenders should still be prepared for an increase in scrutiny. The CFPB signaled in December of 2016 that small business lending was one of their priorities for 2017.
The statement was as follows:
In establishing the CFPB, Congress expressed concern that women-owned ad minority-owned businesses may experience discrimination when they apply for credit and has required the CFPB to take steps in ensuring their fair access to credit. Because small businesses are the backbone of our economy, we are focusing on how to make sure small business owners, including women-owned and minority-owned businesses, can better access lending.
Although the current Interagency Fair Lending Examination Procedures include commercial lending, there has been little scrutiny historically and no specific enforcement actions. This does not mean that commercial credit has been ignored completely by the agencies, because it hasn’t. It does, however, suggest that there are impediments to conducting fair lending examinations of business lending.
On Comparable Files for Review
First, in order to conduct a review focusing on disparate treatment, there has to be comparable files to review. This is difficult in business lending as there are seldom large numbers of similar transactions.
Even in small business where there are sole proprietorships, a customer’s business is often intertwined with their personal finances and assets. The situation’s surrounding the loans can be almost infinite; and there are often differences in collateral and types of businesses, as well, making it very difficult to find “apples to apples” comparisons.
Bear in mind, the goal in a fair lending review is for transactions to be similar, if not identical, in all respects except for the target and control group designation. Finding an adequate number of such at an institution in the commercial space can be akin to finding a needle in the proverbial haystack.
On Commercial Lending Complexity
Second, commercial lending can be complex when compared to typical consumer or mortgage lending.
Commercial lending is a specialty niche, and true commercial lenders at financial institutions are a rare commodity. It takes years of experience to develop the expertise necessary to be a successful commercial lender. Compliance examiners at most of the regulatory agencies have likely had little opportunity to be exposed to business lending to any significant degree, as obtaining and maintaining expertise of consumer regulations itself is vast.
These two factors, perhaps, have been the most significant barriers to any significant attention to commercial lending with respect to fair lending. As financial regulation has grown exponentially, evaluating an institution for consumer-oriented compliance alone is a significant task for any agency.
Despite these challenges, commercial lending could be a significant risk area for commercial banks. The reporting of “HMDA-like” data for CRA would likely increase the possibility of additional scrutiny.
If they have not done so already, lenders should begin taking steps to be prepared.