Proposal Would Increase Transparency in a $2.4 Trillion Sector of the American Economy and Bolster Fair Lending
The Consumer Financial Protection Bureau (CFPB) today proposed a new rule designed to help small businesses gain access to the credit they need and deserve by increasing transparency in the lending marketplace. This rule, mandated by Congress in the Dodd-Frank Act, would, if finalized, require lenders to disclose information about their lending to small businesses, allowing community organizations, researchers, lenders, and others to better support small business and community development needs. Under the proposal, lenders would be required to report the amount and type of small business credit applied for and extended, demographic information about small business credit applicants, and key elements of the price of the credit offered. The CFPB today also launched a web portal for small business entrepreneurs to share their stories about applying for credit, which will help the CFPB understand small business entrepreneurs’ challenges and successes in accessing credit.
“Small businesses are the primary job creators and wealth builders in communities across the country,” said CFPB Acting Director Dave Uejio. “After homeownership, small business ownership is the primary means by which families and communities build wealth. Yet too often, small business development is starved for want of access to responsible, fairly priced credit. Today, we are proposing a rule that would help us all learn how small enterprises fare when trying to access financing, and what barriers are holding them back from further prosperity. Over the next three months, we look forward to hearing from small business entrepreneurs, community organizations, researchers, lenders, and others about how we can improve on this proposal to make sure the final rule serves the purposes Congress had in mind when it mandated this rulemaking in 2010. In addition to requesting comments from small business entrepreneurs on our proposal, we’re also encouraging small business entrepreneurs to share their own stories about applying for credit, through our new web portal, specifically designed for them.”
Small Business Lending and the US Economy
Small businesses are an essential part of the U.S. economy and a significant portion of lending and credit markets. Small businesses employ more than 60 million Americans, or over 1-in-3 working adults, according to the Small Business Administration. From 2010 to 2019, small businesses created nearly twice as many net new jobs as large businesses (10.5 million and 5.6 million, respectively). Because small business ownership is a key path to wealth creation for individuals, families, and communities, small business lending can foster greater equity, and its absence can exacerbate existing inequalities. Failing to make small business lending accessible to all who qualify stifles innovation and competitiveness, and it hampers American entrepreneurship in our cities and suburbs, on our farms, and in all our communities.
The COVID-19 pandemic highlighted the negative economic impact that occurs when policymakers lack the data to best target financial relief. The pandemic hit small businesses hard, with over 33% of small businesses closed at the height of the pandemic. Yet many small businesses struggled to access the small business relief funds Congress appropriated during the COVID-19 emergency. The House Select Subcommittee on the Coronavirus Crisis reported, in October 2020, that some larger banks participating in the Paycheck Protection Program (PPP) “failed to prioritize small businesses in underserved markets, including minority and women-owned businesses.” The report also found that those same small businesses had to wait longer to access the PPP funds once they submitted applications to banks.
Section 1071 of the Dodd-Frank Act requires the CFPB to collect data about small business lending to facilitate enforcement of fair lending laws and to help identify business and community development needs and opportunities. Today’s proposal is the result of years of research, engagement, supervisory work, and policy development. In 2017, the CFPB held a public field hearing on the topic, issued a Request for Information, and published a white paper on the key dimensions of the small business lending landscape. The CFPB also held a symposium on small business lending in 2019. In 2020, pursuant to the Small Business Regulatory Enforcement Fairness Act (SBREFA), the CFPB published an outline of proposals, convened a Small Business Review Panel to gather input on those proposals under consideration, and released a report from the Panel summarizing that input and their recommendations. The CFPB also solicited input from the general public on the outline of proposals and received nearly 60 comments.
The data that would be collected under the proposed rule would assist the CFPB and other stakeholders to identify and address difficulties small businesses experience in trying to access credit, and how current lending practices can be improved. Policymakers, community groups, investors, and bankers will be able to use the data to design more effective small business and community development programs across the nation. Additionally, the CFPB and other government agencies will be able to use the data to aid their ongoing fair lending, supervisory, and enforcement efforts.
Better Information about the Small Business Lending Market
To provide better information about small business lending, the CFPB is proposing to require lenders to collect and report data about credit applications from small businesses, including women-owned and minority-owned small businesses. The data submitted by lenders would shed light on whether they are meeting the needs of the nation’s small businesses. The proposed requirements, which would apply to a wide range of credit products, including term loans, lines of credit, credit cards, and merchant cash advances, would help the CFPB and the public at large, better understand:
- Information about the credit small businesses seek and obtain: Data regarding small business applications for credit would help us better understand small business lending. Lenders would be required to report information about the purpose, type, and amount of credit being applied for, the amount approved or originated, census tract, gross annual revenue, industry code, number of workers, time in business, number of principal owners, and key elements of the cost of the credit (the interest rate and certain fees).
- Demographic information about small business owners: Demographic information about an applicant’s owners would help the government, lenders, and the public identify areas of business and community development needs, new lending program opportunities, and potential fair lending concerns. Lenders would be required to report whether the business is minority-owned or women-owned, and the ethnicity, race, and sex of the applicant’s principal owners. Under the proposal, applicants may decline to answer these questions if they so choose. Lenders would be required to tell applicants that they cannot discriminate on the basis of this demographic information.
- How applications are received and their outcomes: Understanding how applications are received, and their outcomes, would, for the first time, shed light on application-level information related to small business lending. The CFPB is proposing that lenders report information about the application date, method the application was received (in-person, telephone, online, or mail), recipient of the application (the lender or its affiliate, or submitted via a third party), action taken by the lender on the application (originated, approved but not accepted, denied, withdrawn by the applicant, or incomplete), date of action taken, and denial reasons when applicable.
The CFPB is proposing to publish application-level data. However, to address privacy concerns, the CFPB is proposing to modify or withhold data from public disclosure based on an assessment of the risks to privacy interests and the benefits of publication.
The CFPB encourages comment on its proposal. In addition to comments on the overall proposal, the CFPB specifically seeks comments on a variety of issues, including:
- How to define a small business for purposes of this data collection;
- Where to set the activity threshold for when a lender is required to report information;
- How best to collect pricing information for transparency into the cost of small business credit;
- Whether and how to collect certain information about the sex of an applicant’s principal owners;
- How to balance the benefits of public disclosure and the risk to privacy interests; and
- The appropriate implementation period.
Specific and detailed feedback and suggestions for ways to improve the rule will be especially helpful as the CFPB works to finalize the rule in a timely manner. The comment period is 90 days from publication in the Federal Register, and the CFPB does not anticipate a deadline extension. All comments will be carefully considered.
Listening to Small Business Entrepreneurs
The CFPB launched a new Tell Your Story portal today, which lets small business entrepreneurs share their stories about applying for credit. The shared stories of challenges and successes in the credit marketplace will help inform the CFPB’s work, including consumer education, supervision, and enforcement, to protect small business entrepreneurs and create a fairer lending marketplace. It is accompanied by links to educational resources for small business entrepreneurs.