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You can’t solve a problem that you don’t follow.
This is especially true if you rely on federal government intervention. That’s why, several years after the 1968 Civil Rights Act aimed at ending housing discrimination, Congress passed a law requiring many financial institutions to provide information about every home loan application they make. they receive.
The race, ethnicity and gender of the potential borrower. Basic financial and geographic details. If the request has been approved. It is made public – without individuals’ names or other identifying information – and helps expose discriminatory practices.
But for small business loans, there is no equivalent. No national public information. It simply does not exist.
Now, however, he is finally on his way to being created.
To even get that far was a battle.
In 2010, amid the fallout of a financial crisis, Congress mandated the creation of the Consumer Financial Protection Bureau and ordered the agency to collect this data. This happened decades after the Residential Mortgage Disclosure Act. But adopting a rule to initiate reporting was not high on the CFPB’s to-do list.
In 2018, after the agency took some preliminary action on a rule, it backtracked.
The following year, the California Reinvestment Coalition and several other plaintiffs sued the Trump administration to revive the effort.
“This is a real problem, and they’re not collecting the data necessary to make sure this problem is at least somewhat fixed,” said plaintiff ReShonda Young, an Iowa entrepreneur who told the court about her disturbing loan experiences.
The CFPB quickly settled, accepting the deadlines imposed by the court. In September 2021, the journey to data reached a crucial milestone: a real rule proposal.
“It’s extremely important to have better insights into how small business apps and creatives work,” said Kris Andreassen, senior counsel in the agency’s Office of Regulations.
Data like this “is what makes for effective regulation,” said Didier Trinh of the Main Street Alliance, a group that advocates for small businesses.
But public access to data is still a long way off – the process could take several more years. And now there’s a new stage in the battle, with banks and other lenders trying to convince the agency to exempt more of them from its requirements, extend the time before reporting is needed or completely abandon the idea.
More than 2,000 comments from opponents and supporters poured in before the Jan. 6 deadline.
The Independent Community Bankers of America argued that small business loans are much more complicated than mortgages and “should not be subject to a simplified, rigid analysis.” Identical letters submitted by credit union workers and advocates said the requirements “will likely add substantial strain” on member-owned nonprofit financial institutions and could cause them to reduce or stop lending to credit unions. small enterprises. A number of smaller lenders said larger lenders would be in a better position to comply.
“We strongly support the need to ensure that all small businesses are fairly and well served,” the Community Development Bankers Association wrote in its commentary. “Yet we are also concerned about the costs of data collection.”
Proponents of the rule argue that expanding the exemptions would reduce the scope of the data and its effectiveness.
A large 2020 paper for the National Bureau of Economic Research, drawing on a survey of new business owners conducted over several years to fill parts of the information void, found stark disparities in startup loans. owned by blacks and whites. Areas with strong local banks, the authors write, are no better off for black homeowners than communities dominated by national players.
“Black founders are no less fearful of loan rejection in these markets; on the contrary, they are somewhat more likely to report that they did not apply for fear of rejection in areas where local banks are stronger,” concluded the study by Robert W. Fairlie, Alicia Robb and David T. Robinson. “In these regions, white-owned startups receive larger amounts of bank debt on average, but black-owned startups do not.”
Secret shopper testing of lenders by the National Community Reinvestment Coalition found unequal treatment of black and Hispanic testers compared to less qualified white testers. The tests also revealed disparities in the treatment of women compared to men, especially black women.
But the lack of lender-by-lender, application-by-application data for small business loans is a damaging gap that allows discrimination to continue unchecked, community advocacy groups say.
“This has made it difficult, often impossible, to enforce fair lending laws and increase small business lending for women and people of color,” wrote Bethany Sanchez, senior fair lending administrator for the Metropolitan. Milwaukee Fair Housing Council, to the CFPB in support of the proposed rule. “We realize that this lack of transparency was intentional.”
The Paycheck Protection Program, a temporary effort to get repayable loans to small businesses during the pandemic, has highlighted the disparities. Even so, the feds only shared details about finalized loans, not all applications, obscuring the experience of business owners who tried to get help and couldn’t. And early missteps resulted in many lenders not consistently reporting demographic information.
Ashley Harrington, former director of federal advocacy at the Center for Responsible Lending, thinks it would have turned out differently if the small business loan rule had already been in place.
The uneven treatment of loans often manifests itself in ways that are difficult or impossible for a customer to detect, she said. A lender who denies you a loan they gave to a similarly qualified borrower, for example. Or give you worse conditions.
“Part of that, you don’t even realize it’s happening,” Harrington said. “Because that’s exactly what it is. It is just what is given to you. How would you know?”
You can listen to a podcast about plaintiff ReShonda Young’s efforts to tackle the wealth gap in the new season of Break it.
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