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An alarming 89% of small businesses in the Lone Star State are grappling with the fallout of inflation. Operating costs have soared by 20% or more, creating hurdles for enterprises to hire, expand, and compete. To counteract inflation, the Federal Reserve Bank raised interest rates at a record pace. There is evidence the Fed’s rise in interest rates has had its intended effect: cooling of the economy and reduced borrowing.
While the Fed’s fight against inflation continues, Texas small businesses are now facing a new challenge: a Credit Crunch or reduced access to affordable credit. Small and medium-sized Texas Businesses turn to regional and community banks for critical financing solutions often too small for large national banks. In the wake of bank failures in Q1 2023, many banks pulled back on loan growth and focused on maintaining deposits to ensure liquidity. As a result, many small businesses find themselves in the middle of a credit crunch, seeking loans that banks are not willing to extend. In addition to higher interest rates and higher fees on debt, banks may soon be forced to further reduce credit to businesses. A misguided proposal from the Consumer Financial Protection Bureau (CFPB) to cap credit card late fees and end the annual inflation adjustment, would disproportionately harm small financial institutions, jeopardizing their ability to provide vital credit to Texans.
Small banks and credit unions stand to bear the brunt of this change. Unlike their larger counterparts, community banks rely on late fees to supplement the higher borrowing costs to consumers and businesses. Community banks are the lifeblood of small businesses but are the most affected by changes to regulations, like the proposed CFPB change. Undoubtedly, if Banks are not compensated for credit risk (i.e., charge late fees for missed payments) they will be forced to reduce credit to Texas businesses further.
The CFPB’s proposal would require responsible borrowers to supplement irresponsible borrowers. Lenders will be forced to charge higher fees across their portfolio—the result for Texas business: reduced access to credit and higher borrowing costs. Inevitably, banks will be forced to pass along these costs to its customers. This would punish small businesses and individuals who pay their bills on time with higher interest rates, scaled-back rewards programs, and higher annual fees—all directly impacting the consumers the CFPB is supposed to protect. The CFPB’s proposed rule change poses a real threat to Texas small businesses and consumers.
This change would also take direct aim at minority small business owners. These communities often face higher barriers to credit. The unintended consequences this proposed rule would have on marginalized communities run counter to the principles of fairness and equal access that the CFPB aims to uphold. To make matters worse, the proposed rule violates the Small Business Regulatory Enforcement Fairness Act (SBREFA) as the CFPB failed to properly analyze the rule’s effects on small banks’ competitiveness. When the CFPB certified its rule, it neglected to consider how the cap on late fees would affect lenders' ability to continue issuing credit cards.
The harms of the CFPB’s proposed rule are clear. As Texans weather ongoing economic uncertainty, now is not the time to make drastic changes that would threaten 3.1 million small businesses in Texas. I urge Texas’ Congressional delegation to protect our economy and work with Director Chopra to withdraw this proposed rule.
Austin Ward, Houston-Based Banking and Business Development Exec