New Rules Would Target Discrimination in Small-Business Lending

Banks could be forced to collect and report data on the small-business loans they approve and reject -- including the ethnicity and gender of the business owners -- under new rules being crafted by a federal consumer protection agency. Economists and regulators say the data could help identify whether lenders discriminate against minority- or women-owned businesses.

The new rules would aim to "facilitate enforcement of fair lending laws" as directed by Section 1071 of the Dodd-Frank Act. Congress approved the major financial reform legislation in direct response to the last financial crisis.

Mortgage lenders already collect similar data, which help to "shed light on lending patterns that could be discriminatory," according to the Consumer Financial Protection Bureau, the agency tasked with implementing the reporting changes on small-business lending.

The American Bankers Association and other organizations representing lenders oppose the CFPB's steps. The ABA has asked Congress to repeal this provision of Dodd-Frank, arguing the data collection is misguided and could end up reducing access to small-business loans.

"The considerable burdens associated with this data collection and reporting regime would add significant costs and unnecessary red tape to small-business lending, discouraging a primary engine for economic growth," said one letter the ABA recently submitted to Congress.

For business owners, submitting information to lenders would be voluntary.

Discrimination against creditors on the basis of race and sex has been prohibited in the U.S. since the 1970s. But several studies have shown racial and ethnic gaps persist in access to credit, even when controlling for the creditworthiness of the borrower and other factors.

Compared to white-owned firms, minority business owners see their loan applications rejected more often; and when they do get loans, they face higher borrowing costs, according to research by economist Alicia Robb and others.

"If banks had to report lending by race and ethnicity and gender, people could point out those that are not doing well in the market," said Robb, a research fellow at the University of Colorado at Boulder. "That would lead to behavioral change to try and improve the situation."

The CFPB has received hundreds of public comments on the issue. Those include the results of a survey of California nonprofits that work with thousands of small businesses. More than half of respondents said that women and minorities applying for bank loans do face discrimination, according to a report released last week by the California Reinvestment Coalition.

"These findings highlight the importance of the CFPB’s 1071 rule to identify and address discrimination in the small-business lending marketplace," said Kevin Stein, deputy director at CRC in San Francisco. The organization is urging the CFPB to "move quickly" to begin implementing the new rules.

The CFPB has been under fire by Republican lawmakers and faces legal challenges that could undermine its authority. The pressure has intensified since President Trump was elected, and Stein and other small-business advocates fear the agency might be blocked from pursuing additional data from big banks.

In June, the House approved along party lines the Financial Choice Act, by Rep. Jeb Hensarling (R-Texas), which would essentially defang the CFPB's current enforcement and regulatory power.

Big banks dominate the lending market and offer the lowest interest rates and longest repayment terms, making their loan products an attractive option for entrepreneurs looking to grow their businesses. But banks have tightened their business lending since the Great Recession, making it harder for some small-business owners to get affordable credit.

Among women and minority small-business owners in the Bay Area, anecdotes abound of rejections when applying for bank loans.

Tina Paclebar, co-owner of the delivery company RevEx Inc. in Hayward, said her long-term bank cited some late credit card payments when denying her business loan application earlier this year.

Initially, she believed her chances were good of getting the $75,000 loan to upgrade her company's aging vehicle fleet. Her financial statements showed she'd be able to repay it -- her company has been in business for 14 years,  and it's growing and profitable, she said.

Paclebar suspected other reasons influenced her bank's decision. She wonders whether the fact that she's Filipina could have played a role.

"We have a large amount of money in the bank account. We have positive cashflow and constant deposits," said Paclebar, 46. "So I didn't understand why we didn't get the loan."