Lending Patterns by Nonbank Lenders Have Been Long Shrouded in Mystery
FOR IMMEDIATE RELEASE: September 1, 2021
PRESS CONTACTS: Brent Adams, badams@woodstockinst.org, 773-844-5544
Jane Doyle, jdoyle@woodstockinst.org, 708-527-7568
Today, the Consumer Financial Protection Bureau (CFPB) released proposed rules requiring all lenders to small businesses — banks and nonbanks — to collect and report demographic and pricing information on their loans. These rules are necessary to enable regulators to combat discrimination against women- and minority-owned small businesses.
Existing data reveals racial disparities in banks’ lending to small businesses. A 2019 report by Woodstock Institute found that in metropolitan areas across the state of Illinois, small businesses in communities of color received fewer loans from banks than did small businesses in majority-white communities. For the period 2015-2017, 48.7% of small businesses in Chicago were in communities of color but small businesses in these communities received only 42% of banks’ total small business lending. If these communities had received their proportionate share of loans, they would have received 28,010 more loans totaling $354.9 million.
Similar data does not exist for nonbanks’ lending to small businesses. These rules will fill this gap in data reporting. According to the Federal Reserve’s 2020 Small Business Credit Survey, 51% of small businesses considered medium/high credit risk applied for a loan from a nonbank, online lender.
“Data collection is mind-numbingly dull to most people, but it is critical for detecting and deterring discrimination against small business owners of color,” said Brent Adams, Senior Vice President of Woodstock Institute. “There has long been ample research showing racial disparities in small business lending. Today’s proposal is a long-awaited, concrete step toward addressing the issue.”
These rules are mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. California Reinvestment Coalition sued the Trump Administration in 2019 over the delay in creating these rules. In 2020, the CFPB reached a settlement with the coalition under which the CFPB was required to negotiate deadlines for each stage of the rulemaking process and to submit status reports every 90 days detailing the CFPB’s progress toward implementing this law. The CFPB had until September 30, 2021 to release today’s proposal.
Publicly accessible data on small business lending can motivate lenders to increase their lending to women-owned and minority-owned small businesses. The history of the Home Mortgage Disclosure Act (HMDA) data provides powerful evidence that reporting requirements and transparent public disclosure of data is a critical tool to hold lenders accountable and to motivate them to increase their lending to traditionally-underserved borrowers. Woodstock’s annual Community Lending Fact Book relies on HMDA data and provides critical details on mortgage lending patterns across the Chicago region. This information enables consumer advocates like Woodstock to advocate for regulators to pursue enforcement actions to address gaps and disparities in lending.
Women- and minority-owned businesses have faced considerable obstacles in access to loans that have worsened during the pandemic. Most recently, problems at the outset of the Paycheck Protection Program (PPP) meant that many small businesses owned by people of color were unable to access this vital forgivable loan program designed to help small business owners and their employees weather the financial crisis caused by the COVID-19 pandemic. Research from the National Community Reinvestment Coalition (NCRC) found that business owners of color were more likely than White business owners to face discouragement and discrimination when applying for forgivable PPP loans.
The public has 90 days from the date of the proposal’s publication in the Federal Register to comment. The CFPB has also created a portal to enable small businesses to share their experiences trying to obtain loans.
Resources
Read a summary of the proposed rule
View additional materials related to the CFPB’s section 1071 rulemaking
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Woodstock Institute conducts research and advocates for consumer financial protection and community economic development. Our work seeks to combat structural inequities and to improve the quality of life in lower-income neighborhoods and communities of color. Among our areas of focus are predatory lending, access to banking, debt collection, and municipal fines and fees.