It means doubling down on helping your business members become better at what they do.
In March, the Consumer Financial Protection Bureau finalized a new rule that will require lenders to collect and report key data points about their small-business lending, including information about business loan pricing, loan denials, business owner demographics, and minority- and women-owned business enterprise status. CFPB’s chief concern is addressing lending practices that discriminate against women-owned, ethnic minority-owned and LGBTQ+-owned businesses.
Addressing this concern should be no problem for credit unions, since their people helping people philosophy underscores the idea that having access to capital should have nothing to do with the borrower’s color, ethnic background, religious beliefs, gender or sexual orientation. Indeed, having access to capital should have everything to do with whether the business is being controlled and operated by people who understand the structure of their business model. The owners/managers should have the skills in place to run a viable business and demonstrate that the business they’re running is economically sensible and can repay the debt being requested.
Bottom line, the new CFPB reporting requirement only serves to underscore the fact that it’s a great idea for credit unions to help their business members become the best business owners/managers—and therefore potential borrowers—they can be.
History of the New Business Loan Requirement
CFPB’s newly announced reporting activity requirement has been in the works since the Dodd-Frank Act was passed in 2010, creating the agency to be a watchdog over consumer financial services. Small businesses have been in the thought process of CPFB ever since the agency was given a seat on the Federal Financial Institutions Examination Council.
With this new rule, the agency’s focus is initially on any lender making 2,500 loans to small businesses annually. Ultimately, it will reach down to include any lender making 100 or more small-business loans annually. Under this plan, major lenders will be accountable first, and smaller lenders phased in through 2025. Credit unions that have to comply with the new rule will have to create a process for collecting and reporting the required data.
The Importance of Education for All Small-Business Members
What is challenging for small-business lenders is balancing the needs of small businesses in the communities they serve while maintaining lending standards for loan approval based on business borrowers meeting the debt service requirements for the proposed loan. Credit unions need to provide time-efficient and cost-effective access to basic business management education for their small-business members and prospects to help them become better borrowers.
In our experience over the last 40-plus years, small-business lenders typically have said no to credit requests at least 60% of the time. The primary reason small businesses get turned down is that they cannot demonstrate a capacity to repay that meets the proposed lender’s debt service policies and related underwriting guidelines.
To qualify for credit the borrower needs to answer three basic questions posed by the lender:
1. How much do you want? The answer can’t be, “I don’t know for sure, so how much can I get?”
2. What will you use the loan proceeds for? The answer can’t be, “to pay my business expenses and get the assets I need.” Typically, lenders do not initially receive a specific use of loan proceeds game plan. Instead, they get a general response from the borrower that says they plan to use the loan proceeds to pay their bills and buy assets they need. Open-ended responses make it difficult for the lender to link the dollar amount of the request to specific usage plans. They also profile the borrower as a reactive manager and not someone that has a strategic focus for their business.
3. When/how will you pay me back? The answer can’t be, “whenever I have enough profits to enable me to repay the loan.
The bottom line is that all small-business borrowers—in all their diversity—need to demonstrate they qualify for business loans. Most small businesses initially approach lenders lacking an organizational game plan that supports their loan application. The truth is that many business owners would benefit from education about the things they need to know to be capable of engaging in a dialog with a lender about a business loan.
Lenders need to remember that the funding they provide belongs primarily to their depositors. Borrowers need to be creditworthy. Credit unions don’t sell credit; they grant it based on eligibility.
So, the bottom-line question in light of CFPB’s new rule is, “What is your credit union doing to help all of your small-business members and prospects be better business owners and borrowers?”