Small businesses are a pillar of the U.S. economy. They employ nearly half of all of private sector workers, and they account for most of the job creation in this country. Small businesses produce about half of the country’s private nonfarm gross domestic product. Yet many small businesses struggle to gain access to capital, which is necessary for small businesses to grow. The overall outlook for small businesses in terms of access to credit became bleaker during and after the Great Recession as bank lending contracted dramatically. And, while small business lending has rebounded to some extent, too many small businesses are struggling to gain access to safe and affordable credit.
As in so many other areas of the economy, communities of color experience this problem more acutely. Research shows that communities of color do not receive loans in proportion to their share of small businesses. For example, as revealed in a 2017 report by Woodstock Institute entitled Patterns of Disparity, in the Chicago region, businesses in predominantly minority communities constitute about 15 percent of all businesses, but they receive only about eight percent of the number of loans from banks. A 2015 report by Woodstock entitled Her Longer Road Home, revealed disparities in mortgage lending to women in the Chicago region. These facts alone warrant action by regulators, financial institutions, and policymakers to determine (1) the full extent of disparities experienced by women- and minority-owned small businesses in gaining access to credit, and (2) whether such disparities are due to discrimination or other factors.
The situation is made even more critical, however, considering that some online companies known as financial technology (fintech) lenders prey on small businesses that have been left with no other options to access credit. Some fintech lenders charge interest rates in excess of 300 percent! We are concerned that, just as with payday loans and sub-prime mortgages, communities of color may be targeted by these lenders.
We already know what can happen if policymakers take too long to act. In the context of mortgages and the foreclosure crisis, data collected under the Home Mortgage Disclosure Act showed that African-American and Latino families were more likely to receive mortgages they could not afford and, correspondingly, were more likely to experience foreclosure. This resulted in catastrophic losses in wealth and the decimation of many communities.
Targeting certain demographics or communities with predatory loans is not just a matter of morality and justice. Given small businesses’ role as job creators, the impacts of predatory lending spill over into the overall economy. It is urgent that we get a handle on what is happening to women-owned and minority-owned businesses that apply for credit to create and expand small businesses. The ability to protect women- and minority-owned small businesses is directly linked to the ability of gather data about their experiences seeking credit from both bank and non-bank lenders. How can we take action to safeguard these borrowers and communities if we don’t know how lenders are treating them? Correspondingly, we urge the CFPB to move expeditiously in promulgating the rules under section 1071 of the Dodd-Frank Act.