To understand what the Consumer Financial Protection Bureau (CFPB) is doing to small businesses, you need to take a step back and look at Section 1071 of the Dodd-Frank Act. Amongst other things, this section requires financial institutions to send small business loan application data to the CFPB.

Section 1071 has lied dormant even though Dodd-Frank has been around since 2010. But the CFPB is finally trying to implement it. To get the ball rolling, the CFPB issued a Request for Information (RFI) earlier this month. The RFI looks to see:

• What data to use when defining what a small business is
• What part third parties play in the lending process
• How marketplace lenders and other non-bank providers are involved
• Which financial products act as small business funding
• What information providers look at when deciding whether to fund to small businesses

Within the lending industry, there are fears that this data could become firepower for litigators who go after loan providers. The information could also be used by regulators to impose stricter rules for small business lending.

It will be months before the CFPB collects and reads the RFI data. There’s a good chance that before Section 1071 gets rolled out, Richard Cordray, the current head of the CFPB, will have already been replaced. The new head of the CFPB, who will be chosen by President Trump, would assumedly have less interest in adding regulations to the small business lending industry.

Still, there is cause for concern here. The Bureau might be able to use these RFI findings to classify certain small business loans as consumer loans, which would immediately put them within reach of its regulatory arm.

For instance, the Bureau could make the argument that when a small business is owned and operated by one person, lending money to that person is the same as offering a consumer loan, and so it should be regulated similarly.

You can imagine how the small business funding industry would change if it were regulated the same as consumer loans.

Although, there’s another thought to consider: Cordray’s employment is anything but guaranteed. The direction of the CFPB’s agenda could change after Cordray is gone.

 

Will Cordray Last the Year?

Cordray’s five-year term doesn’t expire until July of 2018. But tomorrow, 11 D.C. Circuit Court judges will determine the constitutionality of the CFPB’s structure, and the primary point of debate will be whether Trump should be able to fire Cordray without cause.

Since the D.C. Circuit has more Democratic-appointed judges than otherwise, chances are they’ll say the CFPB is fine as is. The case will then go to the Supreme Court, which will most likely find that Trump should have the power to remove the CFPB director at will.

By the time all of that happens, though, we’ll be closer to the end of Cordray’s term. And maybe he’ll have already resigned.

According to Politico, there’s a chance Richard Cordray will leave the CFPB to run for governor of Ohio. If that happens, Trump will able replace him without having to wait for the Supreme Court to hear the case.

 

How Much Would the CFPB Change?

A couple of weeks ago we told you about how the Financial CHOICE Act would dismantle the CFPB. But it’s looking like the Bureau will simply get a new director. This begs the question: How much would the CFPB change under new leadership?

When Trump named Scott Pruitt as the head of the Environmental Protection Agency (EPA), people pointed out that since Pruitt had ties to the industries that the EPA is supposed to monitor, he might not be the best choice. Despite the apparent conflict of interest, Pruitt stayed.

Why? It seemed to be because the public didn’t care. There was no unbiased outrage. The Democrats were against it, and the Republicans were for it. The conflict dried up as soon as it became a partisan issue.

We shouldn’t expect the same treatment for the CFPB. If Trump tries to put a director in with ties to financial intuitions, the left will make a fuss about it just like they did with Pruitt. The difference will be that the right might listen.

It’s one thing to hear that the head of the EPA is cozy with the fossil fuel industry, but it’s entirely different when it comes to money.

A prominent attorney once said, “The most sensitive part of a man’s anatomy is his pocketbook.”

In the public arena, the Bureau gets support from across the political spectrum, as many Americans see the CFPB as protection from financial institutions that would harm them.

It could be politically damaging for Trump to name a friend of the banks as the director of the CFPB. Trump might be forced to replace Cordray with someone very similar to Cordray.

Even someone you think would tow the line might not. Let’s not forget that Cordray used to be popular in the financial sector. In the past, his political campaigns have enjoyed contributions from some of the institutions he later went after as head of the CFPB.

While many Republicans in Congress are keen to tear down the Bureau, it’s hard to know what the future holds for the CFPB.

 

Final Thoughts

Our major takeaway from the CFPB’s RFI for Section 1071 is that the Bureau is showing greater interest in small business loans. This could mean that the Bureau wants to start regulating it. We’ll keep our eye out for more information on this and other important industry happenings.