[co-author: Shelby Lomax]
As we recently noted, the CFPB released the 23rd issue of its Supervisory Highlights report, focusing on COVID-19 prioritized assessments. In the report, the CFPB identified small business lending as an area that poses a risk of consumer harm. In particular, the CFPB focuses its discussion of small business lending on the Paycheck Protection Program (PPP).
The CARES Act amended Section 7(a) of the Small Business Act (SBA), creating a temporary small business lending program, the PPP. This program gives small businesses access to funds to cover necessary expenses for up to 24 weeks after disbursement. Unlike traditional 7(a) loans, the funds are fully backed by the SBA, and lenders who do not traditionally offer 7(a) loans are eligible to participate.
The PPP began on April 3, 2020, with initial funding of $349 billion. These funds were depleted in less than two weeks. An additional $310 billion became available on April 27, 2020. Early in the program, lenders juggled the need to meet high demand from borrowers, and the consistent program changes from Congress and the SBA. As a result, lenders encountered compliance requirements from the CARES Act, SBA, and other applicable laws, such as the Equal Credit Opportunity Act (ECOA).
After receiving prioritized assessment responses, the CFPB found that some PPP lending practices posed fair lending risks. The responses revealed that many lenders developed policies restricting PPP loan access beyond the standard eligibility requirements of the CARES Act and SBA rules. While some lenders required a small business to be a pre-existing customer in order to apply for a PPP loan, others allowed small businesses to apply if they opened a deposit account. These requirements stemmed from a need to comply with Know Your Customer (KYC) requirements, to prevent fraud, and to manage “extreme demand.”
The CFPB noted that while these policies appeared neutral, they “may have a disproportionate negative impact on a prohibited basis and run a risk of violating the ECOA and Regulation B.” Despite this concern, examiners understood that the reasons for the policies addressed legitimate business needs. The CFPB further stated in the report that it intends to follow up on identified risks in its normal course of supervisory work.
In light of the coming changes to the CFPB’s leadership, it is uncertain what next steps the CFPB may take with regards to small business lending. Nevertheless, small business lenders should heed the CFPB’s advice to “consider the fair lending risks associated with participation in the PPP, in further implementation of the PPP, and in any new lending program and to evaluate and address any risks.” Lenders that choose to continue offering PPP loans should cautiously consider the additional eligibility requirements they place on these loans and prepare to face challenges from the CFPB in the coming year.