The National Community Reinvestment Coalition (NCRC) has spent several years focused on the experiences of women and minorities who seek small business loans. NCRC conducted “mystery shopper” tests in 56 financial institutions in three cities. The tests revealed that all potential customers, regardless of race or gender, received poor customer service when inquiring about loans. However, Black women and Hispanic men received the worst treatment.
Mystery shopping is an important tool as it uncovers both non-overt discrimination and systematic barriers that result in minorities and women being less likely to access credit. Lack of access to safe and affordable business credit is a contributing factor to the racial wealth divide.
Despite these harrowing findings, mystery shopping has shed only a small light on the opaque $1.4 trillion small business lending market. Proper implementation of Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act would reveal who is receiving small business loans and where they are located. It would be publically available and help small business owners make better-educated decisions on how to take out a small business loan. Section 1071 has been the responsibility of the Consumer Financial Protection Bureau (CFPB) since 2011, but the CFPB has yet to implement it.
Implementation of 1071 is important because we don’t currently know how many loans are being made to small businesses as banks have not been required to report or publicly disclose the amount of loans that they have on their books. Banks are only required to disclose Small Business Administration loans and Community Reinvestment Act (CRA) loans, but SBA loans only make up between 3%-7% of the total small business loan market. The CRA small business lending data does not contain any indications of the gender or racial/ethnic background of borrowers.
In May 2019, one of NCRC’s member organizations, the California Reinvestment Coalition (CRC), in conjunction with Democracy Forward, filed a lawsuit in California against the CFPB for its failure to implement Section 1071. Last Week, all of the parties entered into a settlement agreement outlining concrete steps to be taken by the CFPB to finally implement it.
These steps include:
- By September 2020, the CFPB will outline its proposals for collecting the required data and publicly release those proposalsBy October 2020, establish a Small Business Advocacy Review panel to provide input on its proposal
- By October 2020, establish a Small Business Advocacy Review panel to provide input on its proposal
- Negotiate deadlines with the plaintiffs for each stage of the rule making process to facilitate the data collection, including the deadline to issue the final data collection rule, and accept court-ordered deadlines if the parties cannot agreeSubmit status reports every 90 days detailing the CFPB’s progress toward implementing its data collection rule
While the agreement is subject to final court approval, it is long overdue. Combining NCRC’s mystery shopping test results with the eventual public release of the 1071 data will result in all stakeholders finally being able to have a more complete understanding of the small business lending marketplace.
Ali Lederer is NCRC’s Director of Fair Lending and Consumer Protection.
Photo by NESA by Makers on Unsplash
