Comment Intake—Section 1071
Small Business Lending Data Collection
Bureau of Consumer Financial Protection
1700 G Street NW
Washington, DC 20552
January 6, 2022
RE: Docket No. CFPB-2021-0015 / RIN 3170-AA09
Americans for Financial Reform Education Fund commends the Consumer Financial Protection Bureau (CFPB) for its proposed rule on Small Business Lending Data Collection under the Equal Credit Opportunity Act (Reg. B) (Docket No. CFPB-2021-0015). Americans for Financial Reform Education Fund (AFREF) is a coalition of more than 200 consumer, community, labor, civil rights, and other organizations dedicated to advocating for policies that shape a financial sector that serves workers, communities and the real economy, and provides a foundation for advancing economic and racial justice.
Small businesses owned by women and people of color have faced historic, considerable, and persistent inequitable access to financing and credit related to structural racial wealth inequality, patterns of disparate treatment and outcomes securing loans, and discrimination. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amended the Equal Credit Opportunity Act to collect data on small business lending to “facilitate enforcement of fair lending laws and enable communities and governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.” The Equal Credit Opportunity Act outlaws lending discrimination on the basis of race, color, religion, national origin, sex, marital status, or age.
Section 1071 of the Dodd-Frank Act requires the CFPB to collect and disclose small business loan application and disposition data by race and gender including the census tract where the business is principally located. Small business lenders are required to report the type and purpose of loan, the amount requested and amount approved, the disposition of the application, the census tract where the business was located, the gross annual revenue of the business, and the race (and ethnicity) and sex of the applicant. Further, the CFPB was authorized to collect “any additional data” that would fulfill the purpose of the statute.
The proposed rule takes significant and vital steps to assess and enforce compliance with fair lending and anti-discrimination statutes, to identify community development small business capital needs, and to improve transparency in small business credit and lending markets. AFREF wholeheartedly supports the intent of the proposed rule and urges the CFPB to finalize the rule promptly with modest suggested improvements.
The inequitable access to small business credit worsens the racial wealth gap
Small businesses are important engines for economic growth and household wealth building, but historic inequitable access to small business credit has impeded the ability of women and people of color to establish and grow entrepreneurial small businesses. Small businesses generate job growth and innovation and support 30 million families whose income and wealth is tied to the small businesses they own. Just under half of all workers are employed by small business.
This lack of equitable access to small business credit and capital contributes to the racial wealth gap. Small businesses are important routes to wealth building. But persistent racial and gender structural inequalities and discrimination have suppressed entrepreneurship for women and people of color, costing communities of color billions of dollars in economic activity every year. Studies have repeatedly found that Black, Latinx, and Asian small business owners had lower access to capital, are charged higher interest rates, receive lower loan amounts, and have higher loan rejection rates than comparably creditworthy white small business owners. More than half of Black-owned and Latinx-owned businesses that needed financing did not apply for loans because they did not think they would be approved, according to a 2018 SBA survey, and “even the most credit-worthy minority borrowers anticipated being denied credit.”
A vast and disproportionate number of businesses are owned by white entrepreneurs. The Small Business Administration noted that Black and Latinx families were “greatly underrepresented in business ownership.” In 2017, only 3.5 percent of businesses were Black-owned, 5.8 percent were Latinx-owned, 9.7 percent were Asian-owned compared to 81 percent that were white-owned — with Black- and Latinx-owned businesses substantially lagging their proportion of the population.
White families are more likely to own small business and the business equity they own are more valuable than those owned by Black or Latinx families. Black-owned small businesses have been more likely to close, have fewer employees, generate less revenue, and are less profitable than white-owned firms. At the end of 2017, Black-, Latinx-, and Asian-owned small businesses with employees were more likely to break even or operate at a loss than white-owned small businesses — more than half of Black-owned firms did not turn a profit compared to 42 percent of white-owned firms. The 2019 Federal Reserve Survey of Consumer Finances found that white families held business equity at more than twice the rate of Black families and more than three times the rate of Latinx families (16.5 percent, 7.0 percent, and 4.8 percent, respectively), and that white family business equity was far more valuable ($89,000) — nearly twice as valuable as businesses owned by Latinx families ($32,000) and more than 40 percent more valuable than businesses owned by Black families ($70,000).
Despite all these challenges, the number of small businesses owned by people of color has grown steadily and about twice as fast as the number of white-owned firms. By 2019, there were 1.1 million small businesses owned by Black, Latinx, and Asian families. But continued inequitable access to credit and financing makes it more difficult for businesses owned by people of color to sustain, reinvest, and expand their businesses.