Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act may seem like an obscure and arcane provision of a complex financial industry reform law. In fact, it has the potential to dramatically increase access to credit for small women-owned businesses and businesses owned by people of color. As described in a previous blog, Section 1071 mandates that the Consumer Financial Protection Bureau (CFPB) collect data on applications and small business/farm loans from lending institutions and then make the data public.
As the more than 40-year history of the Home Mortgage Disclosure Act illustrates, the public review of data on lending by demographic of borrower heightens accountability of lending institutions and motivates them to increase their lending to traditionally underserved populations. NCRC and our member organizations live by the mantra that data drives the movement for economic justice. Without publicly available data, progress against discrimination, disinvestment and gender and racial/ethnic disparities in lending is much more difficult.
Community-based organizations have submitted hundreds of comment letters on the proposed Section 1071 rule. These letters illustrate how stakeholders use the data to identify and combat ongoing barriers impeding access to credit.
Robust Data Facilitates Agreements With Lenders to Improve Their Practices and Address Unmet Credit Needs
For the past 20 years, GRCRC and Empire Justice Center have used the data disclosed in HMDA in numerous reports and comment letters to shine a light on racial and income disparities in the home mortgage lending market, both to hold lenders accountable and identify strategies to meet unmet credit needs more broadly. The improvements to the HMDA data in the early 1990s and in Dodd-Frank have further aided our data-driven advocacy for equitable lending of responsible mortgage products. We expect a similar benefit when the Section 1071 data becomes public.
NCRC and our members work hard to identify credit gaps and engage with lenders to rectify them. Detailed data is the foundation of our success in that work, as GCRC noted. NCRC works with our members to craft community benefit agreements (CBAs) that commit banks to increase their lending, investing and services to underserved communities. Community groups and banks often negotiate these CBAs when banks are seeking to merge with other lenders and are required by law to demonstrate a public benefit arising from their mergers. Since 2016, NCRC and our members have executed CBAs with 18 bank groups worth a combined $420 billion for mortgage, small business and community development lending, investments and philanthropy in low- and moderate-income and under-resourced communities. Section 1071 data would improve the ability of CBAs to channel credit to underserved small business owners including women, people of color and people with disabilities — if the CFPB includes data on lending to those businesses as urged by several comment letters.
Analysis With Existing Data Shows Potential of Section 1071 Data
The Association of Neighborhood and Housing Development (ANHD) recently conducted a survey through its Immigrant Cultural Corridors initiative, in which ANHD engaged 90 individual immigrant small business owners in three New York City neighborhoods with large immigrant populations. ANHD gathered data through surveys, focus groups and in-depth interviews conducted in English, Spanish and Mandarin. Nearly half (44%) stated that they currently have no place to access additional capital for their businesses and a third spoke of challenges accessing services in their language.
ANHD in its comment letter noted that Section 1071 would further help uncover credit needs that stakeholders could address. Using data on the recent pandemic emergency loan program, the Payment Protection Program (PPP), ANHD found:
PPP loans did not reach people or communities of color — The geographic distribution of loans largely matched pre-existing inequitable lending patterns, with lower concentrations of loans in low-income communities and communities of color where COVID hit hardest.
Loans did not reach the industries that needed them the most — 30% of loans went to businesses that were more suited to working remotely and thus staying in operation. These tended to be industries that paid more and were better served by banks, and less likely to need assistance. Just 50% of the loans went to “face-to-face” industries that had to shut down or reduce operations, like stores, restaurants, and entertainment venues.
If Section 1071 data reveals similar gaps, data disclosure over the ensuing years would hopefully help narrow those gaps. Similarly, the Woodstock Institute explained in its comment letter that as the percentage of people of color in census tracts increased, small business lending decreased across eight metropolitan areas. Exposing these stark disparities would be the proverbial kick in the pants motivating action.
Client Testimonials Show Need for Data
The California Reinvestment Coalition (CRC)’s comment letter, signed by about 60 community-based organizations, featured compelling testimonials from small business technical assistance providers concerning persistent barriers to credit. For example, Access Plus Capital wrote:
All our borrowers have been rejected for bank loans even though 98% of them have paid us back $45 million of the funds deployed to more than 900 business owners. Approximately, 73% of those borrowers are entrepreneurs of color.
The Main Street Business Alliance added in CRC’s letter:
The Black founder of a successful home childcare center started her business with a $25,000 loan and built a relationship with her lender. When she applied for a $200,000 loan to finance her business’ growth, she was rejected eleven times until she was finally able to obtain separate loans to achieve her business goals.
Offering another example, the Central Valley Urban Institute stated:
We had a small Black-owned business owner who had a contract with high speed rail authority for transportation services, but the business owner couldn’t get access to a line of credit from a bank to increase their truck fleet.
Inaccessible Credit Is Hamstringing Southern Farmers and Small Businesses
The HOPE (Hope Enterprise Corporation, Hope Credit Union and Hope Policy Institute) comment letter described penetrating client testimonials and data analysis that not only documented significant barriers in credit access but also demonstrated that additional data reporting can be readily undertaken by lenders.
HOPE’s letter highlighted the feasibility and reasonableness of Section 1071 data:
Financial institutions can comply with Section 1071 because there are a number of small business lending programs and funding opportunities that already require the data. For HOPE, we collect the majority of data for loan originations on our small business applications through the CDFI Fund, the Wells Fargo Diverse Community Capital Program (WFDCC), the Paycheck Protection Program, and SBA 7(a) and Community Advantage Loan program.
Much like HMDA is now, the gathering and reporting of this data will be considered simply as part of our necessary and normal costs of doing business and built into our cost and pricing structure. HOPE does not plan on raising fees or restricting access to credit due to this effort.
If one reads letters from the bank trade associations, one may conclude that the Section 1071 data disclosure requirements would wipe out the smaller community banks. Many of these community banks and credit unions are calling for outright exemptions, or significantly scaled-back Section 1071 data reporting. They claim that relationship-based lending practices make data reporting unnecessary since they naturally serve the hardest to reach small businesses. This rhetoric is overblown. The experiences HOPE documented in their letter are backed up by HMDA data from the Deep South region. The numbers make clear who does and does not get served by these financial institutions. Take Louisiana, for example, where 32% of the population is Black. HOPE found that among the 30 Louisiana credit unions engaged in mortgage lending, 69% of their mortgage loans in Louisiana went to White borrowers while only 15% went to Black borrowers.
Finally, broad exemptions from data reporting by banks or other lenders would mean losing significant amounts of data, making it impossible to determine if credit needs are being met. If the CFPB increased the data reporting threshold for lenders from 25 to 50 loans, as some bank industry voices have requested, the resulting blind spot would be huge. Almost $40 million of loans annually from the states of Alabama, Arkansas, Mississippi, Louisiana and Tennessee would be omitted, based on HOPE’s data analysis. If the threshold was further increased to 100 loans, almost half a billion dollars of loans would be hidden.
Overwhelming Support for Including Agricultural Lending
Small farmers as well as small businesses have experienced insidious discrimination over the decades. Under the largest discrimination settlement in United States history, the Department of Agriculture has made more than $1 billion of payments to African American farmers that experienced discrimination. The Department of Agriculture lending programs were operated by biased county organizations whose elected committee members were virtually all White (1% were African American).
These public sector practices reflected widespread bias in society. The discriminatory and/or inflexible practices made their way into the private sector. For example, a comment letter from 32 farmers, food justice organizations and mission-based lenders, noted:
This connection between credit discrimination and land loss is well-documented, for example, in a 1982 report by the U.S. Commission on Civil Rights on the Decline of Black Farming in America, detailing the numerous connections dating back to the late 1800s between discriminatory farm lending practices and Black land loss. Present-day lending practices are rooted in this legacy, as many farmers continue to face barriers in seeking access to fair credit on fair terms. This history runs so deep in some local communities that Black Farmers do not even walk in the doors of certain financial institutions, or if they do decide to seek credit, they are discouraged during the application process.
In a separate letter, the Farm Aid and the Intertribal Agricultural Council underscored the depths of discrimination still occurring today, even by government lenders. Their letter noted:
In 2021, the United States Department of Agriculture (USDA) rejected direct loan applications for 42% of Black farmers and 37% of Asian farmers, a five-year high for both groups. Only 9% of White farmers were denied loans in 2021. These data clearly demonstrate that discrimination remains and our current system of not requiring reporting of this data does not benefit BIPOC farmers.
Despite the need to hold public sector and private sector lenders accountable, the Independent Community Bankers Association (ICBA) opposed the collection of agricultural lending.
Conclusion: A Robust Database Is a Critical Tool for Economic Justice
It is undeniable that gender and racial/ethnic disparities in access to small business credit are persistent and widespread. The moving testimonials described above are confirmed again and again by mystery shopping and testing conducted by NCRC’s fair lending department. Racism and sexism pervades all aspects of life, including lending, and has caused stark wealth inequalities. While data by itself cannot cure all of these ills, we cannot cure them without it. Data collection rules determine our ability to document ongoing problems and shock at least some stakeholders into action.
Despite more than 40 years’ experience with public home loan data, the banking industry issued apocalyptic predictions including increased consolidation of the lending industry due to the exorbitant costs of small business/farm data collection. It would seem to us, however, that the costs of continued discrimination and/or unequal access to credit is the real harm and that the modest costs of data collection is a necessary part of the remedy to our societal disease.
Josh Silver is a Senior Policy Advisor at NCRC.