Today, the Consumer Financial Protection Bureau (CFPB) released a request for comment regarding its proposal for implementing Section 1071, the portion of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) that required the CFPB to collect and publish small business lending data.
The new data will gather and disclose important demographic and pricing information on loans to small businesses, with a focus on woman-owned and small businesses owned by people of color. The statutory purposes of Section 1071 were to facilitate compliance with fair lending laws and to assess whether the “business and community development needs and opportunities” of traditionally underserved businesses are being met.
Underserved communities have waited long enough – more than a decade after passage of Dodd-Frank. We urge the CFPB to expeditiously finalize its proposed rule.
We applaud the CFPB for issuing a strong proposal and call on the Bureau to ensure that it will maintain robust data reporting requirements to ensure that Section 1071 data exposes abusive lending practices, helps defend women- and minority-owned firms from unfair lending and extends coverage to all forms of credit utilized by smaller businesses including merchant cash advances.
Today’s release of the proposed rule marks an important step to finally gather and report that data. Notably, compliance of the rule will extend to a broad range of institutions, including banks, finance companies, CDFIs, non-profit lenders and online fintechs. However, some proposals would keep lending activity in the dark, such as the proposal to not report factoring, a form of credit that usually costs more than other types of lending, and which has been subject to abusive practices in the past.
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. Public agencies as well as community-based organizations have used HMDA data to observe trends in lending in communities of color and modest-income neighborhoods. With the evidence revealed by HMDA, these groups and others have engaged in productive dialogue with lenders, and if necessary, the same groups have advocated 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, structural 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 CFPB agreed to a September 30, 2021, deadline to issue the proposal as part of a settlement agreement reached in response to a lawsuit brought by the California Reinvestment Coalition (CRC), the National Association for Latino Community Asset Builders (NALCAB), and small business owners in Iowa and Oregon.
By providing a regularly updated and publicly available data set on lending trends, Section 1071 promises to narrow disparities in access to lending. Additionally, we call on the Bureau to make the data available in a format that the public can use easily, regardless of their level of computing sophistication.
The following are initial reactions to the CFPB proposal by leading advocates and practitioners in the small business lending field:
Community Reinvestment Act exams and need for detailed Section 1071 data
“It is our hope that the Section 1071 data replaces the current data reported by banks for their CRA exams. The current CRA exam data does not provide the details we need to make sure banks are serving the smallest businesses in underserved communities. More detailed Section 1071 data, reported to CFPB, should become the data set used in CRA exams, just like HMDA data, which is also reported to CFPB and then referenced in CRA exams. In addition, we need robust data on access to credit for businesses owned by people of color and women to help us narrow wide gender and racial disparities in access to credit.” – Jesse Van Tol, President and CEO, National Community Reinvestment Coalition
The importance of the data for city officials and other stakeholders striving for racial equity
“Small businesses are the backbone for job growth in many cities across the country. Access to capital is an important tool to help businesses build their capacity. Unfortunately, black and brown businesses disproportionately have less access to capital. Because minority and women-owned businesses are more likely to hire minorities and women, this barrier has direct implications on creating employment opportunities in black and brown communities. Access to data that provides a clearer picture of why and where access is limited will help to create equity in underserved communities.” – Catherine “Katy” Crosby, Town Manager of Apex, North Carolina, and NCRC board chair
“NALCAB applauds the Consumer Financial Protection Bureau (CFPB) for releasing the Notice of Proposed Rulemaking and moving forward with the implementation of Section 1071 which will provide the data needed to increase opportunities for women-owned, minority-owned, and small businesses. Latino small businesses play a vital role in our economy but continue to face challenges in accessing capital. Finalizing this law helps increase transparency, foster compliance with fair lending laws and ensure these entrepreneurs can do what they do best, create jobs and stimulate the economy.” – Marla Bilonick, President and CEO, National Association for Latino Community Asset Builders (NALCAB)
“We’re pleased to see that the CFPB is finally moving forward with this critical rule. Systemic discrimination has plagued and illegally held back Black, Indigenous, and People of Color and women-owned small businesses for too long. To further the goals of the legislation, we need not only a strong data collection rule, but also the full disclosure of lending data collected so that transparency can inform policy making and lead to more fair lending that helps close the racial wealth gap. And where lending disparities remain, we need strong enforcement to attack discrimination and provide relief to impacted businesses that hire locally, serve our communities, and make our economy run.” – Kevin Stein, Deputy Director, California Reinvestment Coalition
“We applaud the CFPB for moving forward with this critically important rulemaking. Small businesses play a vital role in our economy, yet research shows that people of color and women-owned businesses are more likely to be rejected for credit or pay higher rates than their white male counterparts. In order to continue to encourage the growth of small businesses and their positive effect on the economy, it is imperative to understand the challenges they face in accessing credit and to ensure financial institutions are complying with fair lending laws. Today’s proposed rule moves us forward towards requiring the data collection necessary to build a more equitable small business lending market.” – Linda Jun, Senior Policy Counsel, Americans for Financial Reform
“We are encouraged by the release of the proposed rule from CFPB on long-overdue and much-needed implementation of Section 1071. Our small business members care about equitable access to credit, especially for women- and BIPOC-owned businesses, who have historically been left out of credit markets. The current data is inadequate to fully understand, let alone remedy, the extent to which discriminatory lending creates credit deserts for small businesses and businesses owned by women and people of color. Collecting this data is key to effectively implementing this rule and ensuring a thriving small business economy.” – Didier Trinh, Director of Policy and Political Impact, Main Street Alliance
“Implementing 1071 is good and equitable policy for businesses color, particularly businesses in the Deep South – a region that is defined by a legacy of racially motivated practices of exclusion and discrimination. Several federal relief programs such as the Paycheck Protection Program, have directed relief for these communities but have missed the mark, especially among small, self-employed businesses. Programs that rely on existing banking relationships will continue to fail these businesses in the Deep South because banks, historically, have not prioritized these communities. Given that over 95% of Black and Latino businesses in the Deep South are self-employed, enforcing fair lending across all financial institutions can be the difference between sustaining revenue and clientele or unfortunate closure for these small businesses during the pandemic. Minority-owned businesses deserve a fair chance at financial stability, and implementing 1071 strengthens the fight to addresses racial disparities in banking that have existed for far too long.” – Kiyadh Burt, Senior Policy Analyst, Hope Policy Institute
Collect data from a broad range of lenders on a wide range of small business products, with few exceptions
“Opportunity Finance Network is pleased to see the CFPB put forth this long-awaited Section 1071 proposed rule that will provide much needed transparency into the small business lending market. A robust rule that covers as many lenders as possible is key to assessing the ability of our nation’s small businesses – especially businesses owned by women and people of color – to access affordable, responsible credit.” – Dafina Williams, Senior Vice President of Public Policy, Opportunity Finance Network
“To ensure a fair and level playing field, government small business lending programs must be included in fair lending reporting requirements. The limited data that is currently available clearly shows that small business capital resources available through state and local governments are not equitably distributed. For example, the state of Tennessee’s small business grant program for COVID-relief deployed over 90% of its dollars to white-owned businesses. As states get ready to deploy over $10 billion through the State Small Business Credit Initiative, requiring fair lending by government run and funded programs is all the more critical. There is already too high of a cost for inequities in lending to minority-owned businesses. Section 1071 is the opportunity to address the malpractice and create a level playing field to the benefit of lenders and businesses alike.” – Diane Standaert, Director, HOPE Policy Institute
“We applaud the CFPB for moving forward with the disclosure of long-needed small business lending data. The absence of comprehensive lending data has hindered proper analysis of small business lending and our ability to hold lenders accountable. The new Section 1071 data, along with the recent release of local data on storefront vacancies in NYC, will help us understand the factors contributing to racial disparities in rents, vacancy rates, and access to credit among New York’s small businesses,” – Barika X. Williams, Executive Director, Association for Neighborhood & Housing Development’s (ANHD’s)
Need to comprehensively cover products
“Research has shown that Black and Hispanic business owners apply for factoring, equipment financing, and merchant cash advance products more frequently than White entrepreneurs. With Section 1071’s intended purpose to facilitate enforcement of fair lending laws and over 18 million of these financial agreements active, it is critical that the CFPB be comprehensive in its coverage and collect demographic and pricing data on these less transparent and potentially higher cost financial products. Entrepreneurs of color and women business owners have waited over a decade for the implementation of Section 1071 of the Dodd Frank Act, and we must get it done right.” – Luz Urrutia, CEO, Accion Opportunity Fund
Collect disaggregated data on race and ethnicity of business owner/s
“We applaud the CFPB for moving forward on this direly needed rulemaking process. Collecting improved and disaggregated data on the thriving Small Business community in the US is absolutely critical to ensuring equity across our financial systems. Through entrepreneurship, so many Americans are able to not only build wealth despite discrimination in the workplace but also, build thriving cultural districts that create jobs for many left out of the mainstream economy. Because of our broad diversity in income and ethnicity, disaggregated data by ethnic sub-group is particularly important for low-income Asian American and Pacific Islander communities, who will continue to be misunderstood and underserved without a more nuanced understanding of their credit needs.” – Seema Agnani, Executive Director, National Coalition for Asian Pacific American Community Development (CAPACD)
The Bureau should use its discretionary authority to collect additional information, including loan pricing
“We are pleased the CFPB is moving forward with the implementation of this rule. Knowing more about the pricing of lending for small businesses is critically important, especially for products like merchant cash advances. The smallest of small businesses, particularly those owned by people of color, historically have lacked access to business capital, resulting in added and often unjustifiable costs that can make or break a business. Transparency in the delivery of small business lending is long overdue, and we look forward to working with the CFPB on finalizing this rule.” – Aracely Panameño, Director of Latino Affairs, Center for Responsible Lending
“There has long been ample research showing racial disparities in small business lending, but the federal government has lacked a mechanism to collect the data necessary to address this issue. Today’s release is a long-awaited, concrete step toward protecting small businesses.” – Brent Adams, Senior Vice President, Woodstock Institute
For additional information on 1071, visit: https://ncrc.org/fact-sheet-on-section-1071-small-business-loan-data/