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F ederal r eser ve b a n k o f Dallas DALLAS, T EX AS 75222 Circular No. 81-11 January 15, 1981 PUBLIC DISCLOSURE TO ALL MEMBER BANKS AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Federal Financial Institutions Examination Council is requesting public comment on the feasibility and usefulness of public disclosure of small business loan activity and on methods of such disclosure. All comments should be directed to David K. Scheitzer, Deputy Executive Secretary, Federal Financial Institutions Examination Council, Eighth Floor, 490 L'Enfant Plaza, S.W., Washington, D. C., 20219, telephone (202) 287 4206, and should be received no later than February 17, 1981. Printed on the following pages is a copy of the Council's notice requesting comments, including a discussion of specific issues to which comment should be addressed. Sincerely yours, William H. Wallace First Vice President This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL Request fo r Comments on the F e a s i b i l i t y and Usefulness of Requiring Depository I n s t i t u t i o n s which Make Small Business Loans to Compile and P ublicly Disclose Information Regarding Such Loans. AGENCY: Federal Financial I n s t i t u t i o n s Examination Council COMMENT DEADLINE: February 17, 1981 INTRODUCTION: The Federal F inancial I n s t i t u t i o n s Examination Council (Council), which is composed of r e p r e s e n t a t i v e s of the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Federal Home Loan Bank Board, National C redit Union Administration and Office of the Comptroller of the Currency, i s required by Section 311(d) of the Housing and Community Development Act o f 1980 (Public Law 96-399) to conduct a study to assess the f e a s i b i l i t y and usefulness of req u irin g depository i n s t i t u t i o n s which make small business loans to compile and p u b licly d is c lo s e information regarding such loans. The r e s u l t s of t h i s study are to be reported to the House and Senate Banking Committees not l a t e r than March 1, 1981. As p a r t of i t s study, the Council requests comment from the pub lic--in clu d in g small b u sin e sse s, f in a n c ia l i n s t i t u t i o n s , comnunity o r g a n iz a tio n s, trade a s s o c ia ti o n s and the academic community--on the general f e a s i b i l i t y and usefulness of public d is c lo s u r e of small business loan a c t i v i t y and on various issues r e l a t e d to method of d is c lo s u r e should such a requirement be deemed a p p r o p ria te . DISCUSSION: The Congressional c a l l f o r t h i s study on small business loan d isc lo s u res appears to have o r i g in a te d from a concern in some communities t h a t lenders - 2 - a re giving i n s u f f i c i e n t a t t e n t i o n to the c r e d i t needs of small businesses, e s p e c ia ll y those located in low- and moderate-income neighborhoods. It has been suggested t h a t small business lending p a tte r n s in a community can be i d e n t i f i e d most e f f e c t i v e l y by req u irin g public d is c lo s u r e of the small business lending a c t i v i t i e s of local depository i n s t i t u t i o n s , j u s t as public d is c lo s u r e of mortgage lending data under the Home Mortgage Disclosure Act (HMDA) i s seen by many as useful in id e n tif y in g mortgage lending p a t t e r n s . Although the mandatory d is c lo s u r e of small business lending a c t i v i t y might be judged both f e a s i b l e and useful in an a bsolu te sense, the Council requests t h a t a l l comments be d ir e c te d to the r e l a t i v e value of such d i s c losures in terms of real costs and b e n e f i t s . Depository i n s t i t u t i o n s should consider c a r e f u ll y the a dditional demands such a d is c lo s u r e r e q u ir e ment would place on t h e i r business o p e r a tio n s, and p o te n tia l users of the data should describe c l e a r l y the b e n e f its the proposed d isc lo s u r e s would provide to them. For purposes of the issues r a is e d below, the term "depository i n s t i t u t i o n " means any commercial bank, savings bank, savings and loan a s s o c i a t i o n , c r e d i t union, or s i m i l a r i n s t i t u t i o n (including any majority-owned sub s i d i a r i e s ) the deposits or accounts of which are insured by an agency of th e federal government or which i s regulated by any agency of the federal government. The d e f i n i t i o n of "small business loan" is open f o r comment under Issue A2. In g e n e ra l, however, "business loans" may be considered to include a l l c r e d i t extended to any n atu ral person, busin e ss, or o r g a n iz a tio n , which is not considered "consumer c r e d it " under Federal - 3 - Reserve Regulation Z, Truth in Lending (TIL), and i s exempted from TIL 1/ d i s c lo s u r e requirements on the basis of 12 CFR 226.3(a). ISSUES: A. S p ecific Issues 1. D e fin itio n of "Small Business." I f d i s c lo s u r e of small business lending a c t i v i t y were to be requ ired, the term "small business" would have to be defined. P ossib le d e f i n i t i o n s could be based upon the complex e l i g i b i l i t y standards e s ta b lis h e d by the Small Business Administration (SBA) f o r use in i t s various programs, sim p lifie d v a r i a t i o n s of the SBA standards ( e . g . , abbreviated Standard I n d u strial C l a s s i f i c a t i o n , a s s e t s i z e , and employee count), or a s i n g l e c r i t e r i o n such as number of employees a t the borrowing firm. Comment is requested on the advantages and disadvantages of various approaches to defining "small business" and s p e c i f i c a l l y on the f e a s i b i l i t y of using number of employees as the determinant. Comments should include discussion of whether the borrower c h a r a c t e r i s t i c s needed f o r a p a r t i c u l a r d e f i n i t i o n a re c u r r e n t ly recorded by f in a n c ia l i n s t i t u t i o n s ; and, i f not, whether the information is r e a d i ly a v a i la b le from borrowers and the a n t i c i p a t e d expense of modifying recordkeeping systems to c o l l e c t i t . I f SBA g u id e lin e s were used to define the siz e of a busine ss, information such as s a l e s , a s s e t s i z e , employment, e t c . , would have to be recorded on a consolidated basis where the borrowing business was a subsidiary or d iv is io n of a l a r g e r commercial e n t e r p r i s e . What e f f e c t would imposing t h i s procedure have on the l e n d e r 's a b i l i t y to c o l l e c t required 17 Regulation Z (12 CFR 226) Section 226.2(p) s t a t e s in p a r t '"consumer c r e d i t ' means c r e d i t offered or extended to a natural person . . . prim a rily f o r personal, family, household or a g r i c u l t u r a l purposes." The exemption in Section 226.3(a) covers "extentions of c r e d i t to o r g a n i z a ti o n s , including governments, or f o r business or commercial purposes, o th e r than a g r i c u l t u r a l purposes." - 4 - information and on the u t i l i t y of the r e s u l t i n g data to community users? A lt e r n a t i v e l y , would d is c lo s u r e s based on unconsolidated information r e l a t i n g only to the local borrower ( e . g . , the subsidiary) have any value? 2. D efin itio n of "Small Business Loan." The Council seeks comment on whether a l l c r e d i t granted to a borrower meeting the d e f i n i t i o n of "small business" should be considered a small business loan f o r d is c lo s u r e purposes. Where the lender has more than one department approving various types of c r e d i t to small b usinesses, what d i f f i c u l t i e s , i f any, could be encountered in attempting to consolid ate loan data from m ultiple departments? Should a l i n e of c r e d i t be counted as one loan f o r the t o t a l amount a t the time i t is e s ta b li s h e d , or should each draw a g a in s t t h a t l i n e be counted as a separate loan? Are th ere other unique commercial c r e d i t arrangements t h a t could complicate disclosu res? 3. Loan Data. HMDA r e q u ire s mortgage loan data to be compiled in terms of number of loans and t o t a l d o l l a r amounts (of o rig in a l p r in c ip le o r ig in a te d or purchased). Considering t h a t commercial loans are less homogeneous in ch a ra c te r than r e s i d e n t i a l mortgages, comment i s sought on the app ro p riate loan data d is c lo s u r e s fo r small business loans. Comment is s p e c i f i c a l l y requested on the f e a s i b i l i t y and usefulness of separating d is c lo s u r e s on the basis of such c r i t e r i a as (a) purpose of loan, (b) term of loan, o r (c) conventional versus government guaranteed. The Council a ls o requests comment on whether d isc lo s u re s should be broken down by the borrower's type of industry. For example, what added co sts and b e n e f it s would r e s u l t i f loans were separated on the basis of the nine basic industry groups i d e n t i f i e d by U.S. Standard I n d u s t r ia l C l a s s i f i c a t i o n numbers? - 4. 5 Data Aggregation and Item ization. - HMDA req uires t h a t i n s t i t u t i o n s with o f f i c e s in standard metropolitan s t a t i s t i c a l areas (SMSA's) d is c lo s e mortgage loan data aggregated by SMSA and t h a t , within SMSA's, data be itemized by census t r a c t . HMDA also provides t h a t rep o rtin g i n s t i t u t i o n s record aggregated data on lending o u tsid e of the SMSA without item iza tion. The Council requests comment on whether si m il a r requirements would be f e a s i b l e and useful f o r d is c lo s u r e s of loans to small businesses What kind o f geographic information is r o u tin e ly recorded on commercial loan a p p lic a tio n s ? I f a borrower operates a t m ultiple l o c a t i o n s , what ad d itio n a l information would have to be recorded to allow i d e n t i f i c a t i o n of the business l o c a tio n receiving primary b e n e f i t of the c r e d i t extended? What a d d itio n a l costs would be incurred in t h i s process? If no s in g l e location receives the primary b e n e f i t , how should such a loan be i d e n t i f i e d geographically f o r d is c lo s u r e purposes? S p e c ific comment on the f e a s i b i l i t y and usefulness of compiling and d is c lo s in g small business loan data in non-SMSA ( e . g . , r u r a l ) areas \ i s a ls o requested. 5. Exemptions. Section 309 of HMDA (and Section 203.3(a)(1) of Regulation C 12 CFR 203) s p e c i f i c a l l y exempts depository i n s t i t u t i o n s with l e s s than $10 m illio n in a s s e ts from mortgage loan d isc lo s u re requirements. The Council s o l i c i t s comment on whether a s i m i la r exemption would be appro p r i a t e with regard to any requirement f o r small business loan d isc lo s u re s Views on the r o l e of small i n s t i t u t i o n s in providing c r e d i t to small businesses and on what e f f e c t exclusion of small i n s t i t u t i o n loan data would have on the usefulness of d isc lo s u r e s would be h e lp f u l. - B. Summary Issues 1. General F e a s i b i l i t y . 6 - In addition to the foregoing s p e c i f i c issues the Council requests comment, e s p e c ia ll y from depository i n s t i t u t i o n s , on the overall increase in cost of operations t h a t would r e s u l t from required small business loan d is c lo s u r e s . Would such costs be v a r ia b le or f i x e d , one time or r e c u r r in g , r e l a t e d to the s i z e of the i n s t i t u t i o n , etc.? In a d d i tio n , the Council requests comment on whether p a s t c o s t / b e n e f i t experience under HMDA i s r e le v a n t to the recording and d is c lo s u r e of small business loans. What unique c h a r a c t e r i s t i c s of business lending might pose special problems not found with d is c lo s u r e s of mortgage lending a c t i v i t y ? How can such problems be overcome and a t what cost? Commentors are requested to s u b s t a n t i a t e t h e i r conclusions on t h i s issue by describing in d e t a i l the f a c t o r s considered. 2. General Usefulness. P o te n tia l users of d is c lo s u r e s of small business loan a c t i v i t y are assumed to be prim arily the same groups c u r r e n t ly using HMDA data ( i . e . , community action groups, local and s t a t e govern ment agencies, p r iv a t e and government r e s e a r c h e r s , the federal f i n a n c ia l re g u la to ry agencies, e t c . ) plus the business community i t s e l f . The Council requests comment from a l l categories o f p o te n tia l users on what s p e c i f i c needs or problems c u r r e n t ly e x i s t which they expect to be s a t i s f i e d or resolved by requiring depository i n s t i t u t i o n s to compile and p u b licly d is c lo s e information regarding loans to small businesses. The Council considers i t important fo r p o te n t ia l users to s u b s t a n t i a t e both t h a t information i s needed and t h a t public d is c lo s u r e of small business lending by depository i n s t i t u t i o n s would be the most e f f e c t i v e means of obtaining i t . COMMENTS: Any person or organ izatio n wishing to comment on the issues ou tlin ed above may do so by f i l i n g a w r itte n submission with the Council, to be received not l a t e r than February 17, 1981. All submissions will become p a r t of the record and w ill be a v a i l a b le f o r public review. All w r it te n comments, or requests f o r f u r t h e r information, should be d i r e c te d to David K. Schweitzer, Deputy Executive S e c re ta ry , Federal Financial I n s t i t u t i o n s Examination Council, Eighth Floor, 490 L'Enfant P laza, SW, Washington, DC 20219, telephone (202) 287-4206. Dated: December 22, 1980 (signed) Robert J. Lawrence Robert J . Lawrence Executive S ecretary Federal Financial I n s t i t u t i o n s Examination Council
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