The CFPB Won Big At The Supreme Court — But The Fight Over Small Business Lending Discrimination Is Just Beginning

After the Supreme Court found the Consumer Financial Protection Bureau’s (CFPB) funding structure constitutional, racial and economic justice advocates had many reasons to celebrate. 

But despite that good news, one key CFPB policy that will help combat discrimination in small business lending remains under threat. Another lawsuit filed by powerful lobbyists at the American Bankers Association (ABA) – and a pair of Texas-based affiliates that allow the bank industry to bring the case in a favorable jurisdiction – threatens to repeal a set of rules known as Section 1071 before its implementation. Conservative lawmakers and predatory lenders will continue to try and weaken the CFPB in order to avoid accountability for racist lending practices that have skyrocketed their own profits and deprived communities of color of wealth. 

The stakes are too high for racial and economic justice advocacy groups to remain complacent. Even without the key details Section 1071 will provide, existing data demonstrate that people of color are being excluded from owning a business, creating wealth and bolstering the nation’s economy.

Racial Inequities in Capital Access

As of 2021, there were 5.7 million employer firms in the US. Black people owned 2.7% of them, in a country where Black people are about 12% of the population. The 19% of the US population who are Latino own just 6.9% of the nation’s businesses.

The underrepresentation of people of color in small business ownership is directly tied to racial wealth inequality. Personal savings were the most common source of start-up capital in a recent Small Business Administration (SBA) survey of entrepreneurs – and given the vast racial wealth divide in the US, non-White people are far less likely to have the money to act upon their business ideas. Recent Federal Reserve estimates suggest the median wealth is $44,900 for Black households and $61,600 for Latino households, while the median wealth is $285,000 for White households. 

A would-be business owner who cannot cover their start-up costs from money they already have must borrow it instead. But small business owners of color continue to report discriminatory treatment by lending institutions, as NCRC’s “mystery shopper” investigations have repeatedly found. The 2022 Small Business Credit Survey found that 35% of White-owned employer firms successfully obtained all the traditional funding they sought in 2021 in contrast to, just 19% of Hispanic-owned firms, 16% of Black-owned firms and 15% of Asian-owned firms. 

In a sub-sample of small business credit applicants regarded as “low credit risk” by the survey, White-owned firms got all the funding they sought 43% of the time, compared to 27 and 24% respectively for Black and Hispanic firms in the “low credit risk” subset. The survey also measures the opposite end of the applicant experience, where business owners report being declined for every dollar they sought. Just 27%of low-risk White-owned businesses reported getting turned down for every loan they sought, while 41% of low-risk Black and Hispanic firms said they obtained none of the financing they applied for. 

A lack of access to affordable capital negatively impacts the financial health of Black, Indigenous and people of color (BIPOC) business owners and increases the risk that BIPOC-owned firms accumulate debt. The 2022 Small Business Credit Survey reported that 39% of Asian-owned firms, 36% of Black-owned firms and 28% of Hispanic-owned firms described their financial condition as “poor,” in contrast to only 17% of White-owned employer firms.

With racism ingrained in the financial system, entrepreneurs of color often battle long odds to secure affordable capital to launch and sustain their businesses. Section 1071 can play a role in weakening these barriers. 

The Promise of Section 1071

The final Section 1071 rule, announced by CFPB Director Rohit Chopra at the 2023 Just Economy Conference, would require lenders to file public, annual reports on the race, ethnicity and gender of the small business owners that apply for loans. Loan data on the race and ethnicity of applicants will be disaggregated by subgroups – Asian applicants, for example, can specify whether they are Indian, Chinese, Filipino, etc. – allowing for a more nuanced analysis of racial lending disparities. 

The rule requires lenders to report additional data points beyond demographic information, such as pricing information (e.g. interest rates, broker fees, etc.), loan denial reasons and details on the type of small business involved (e.g. business size, revenue and category of industry). Although lenders fought hard to prevent this disaggregation of the data, it has proven popular with loan applicants. For researchers and policymakers, disaggregated data offers critical insights into the nuances of how credit is apportioned to communities traditionally excluded from the financial system.

Right now, lenders can claim that disparate outcomes highlighted by abstracted and aggregated disparity data are not their fault. But when the public and the oversight bodies know who is and is not receiving credit from specific lenders, financial institutions will face new pressure to adopt fairer lending practices that combat lending discrimination and curb excessive pricing. Section 1071 holds lenders accountable for decades of small business lending discrimination by making their loan approval process more transparent. 

This transparency can also bridge the trust gap between banks and entrepreneurs of color: The same federal surveys discussed above indicate that BIPOC business owners are highly discouraged, and therefore less likely to invest the time and energy to even apply for loans. The spotlight of Section 1071 may give these neglected parties more confidence that they have a fair shot, and thus more likely to apply for a loan. 

A Call to Action

Section 1071 will increase the flow of capital to BIPOC-owned businesses – provided that the bank lobbyists suing to block the rule do not succeed. Racial and economic justice advocates have the facts on their side in that court case. But that by no means guarantees victory in the Texas court where national lobbyists chose to bring the case. And while the Biden administration has blocked other attacks on the rule, the political future of the country is uncertain. There is no guarantee that future administrations would take the right side of the issue – which requires advocacy groups to stay diligent in the fight to protect Section 1071. 

As vital as it is to vindicate the final rule in court and in Congress, that defense work is only the beginning of the fight for equitable access to small business capital. While Section 1071 is a first step to catalyze the growth of BIPOC-owned businesses, it is not a comprehensive solution to lending discrimination. Entrepreneurs of color also need continual investment in resource ecosystems that provide low-cost capital and technical assistance. And once the CFPB starts collecting and publishing Section 1071 data, both government agencies and non-governmental organizations will have to use it to push for increased lending to BIPOC-owned businesses. That will create new jobs, boost local economies in underserved areas and help reduce racial wealth divides.

Manan Shah is a Project Specialist at NCRC.

Photo via Paul Sableman on Flickr.

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