Proposed Rule2021-19274
Small Business Lending Data Collection Under the Equal Credit Opportunity Act (Regulation B)
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Published
October 8, 2021
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Bureau of Consumer Financial Protection (Bureau) is publishing for public comment a proposed rule amending Regulation B to implement changes to the Equal Credit Opportunity Act (ECOA) made by section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Consistent with section 1071, the Bureau is proposing to require covered financial institutions to collect and report to the Bureau data on applications for credit for small businesses, including those that are owned by women or minorities. The Bureau's proposal also addresses its approach to privacy interests and the publication of section 1071 data; shielding certain demographic data from underwriters and other persons; recordkeeping requirements; enforcement provisions; and the proposed rule's effective and compliance dates.
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[Federal Register Volume 86, Number 193 (Friday, October 8, 2021)]
[Proposed Rules]
[Pages 56356-56606]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-19274]
[[Page 56355]]
Vol. 86
Friday,
No. 193
October 8, 2021
Part II
Bureau of Consumer Financial Protection
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12 CFR Part 1002
Small Business Lending Data Collection Under the Equal Credit
Opportunity Act (Regulation B); Proposed Rule
Federal Register / Vol. 86 , No. 193 / Friday, October 8, 2021 /
Proposed Rules
[[Page 56356]]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1002
[Docket No. CFPB-2021-0015]
RIN 3170-AA09
Small Business Lending Data Collection Under the Equal Credit
Opportunity Act (Regulation B)
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Proposed rule; request for public comment.
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SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is
publishing for public comment a proposed rule amending Regulation B to
implement changes to the Equal Credit Opportunity Act (ECOA) made by
section 1071 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act). Consistent with section 1071, the
Bureau is proposing to require covered financial institutions to
collect and report to the Bureau data on applications for credit for
small businesses, including those that are owned by women or
minorities. The Bureau's proposal also addresses its approach to
privacy interests and the publication of section 1071 data; shielding
certain demographic data from underwriters and other persons;
recordkeeping requirements; enforcement provisions; and the proposed
rule's effective and compliance dates.
DATES: Comments must be received on or before January 6, 2022.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2021-
0015 or RIN 3170-AA09, by any of the following methods:
<bullet> Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the instructions for submitting comments.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#97a5a7a5a6bad9c7c5dabaa6a7a0a6d7f4f1e7f5b9f0f8e1"><span class="__cf_email__" data-cfemail="fdcfcdcfccd0b3adafb0d0cccdcaccbd9e9b8d9fd39a928b">[email protected]</span></a>. Include Docket No. CFPB-
2021-0015 or RIN 3170-AA09 in the subject line of the message.
<bullet> Mail/Hand Delivery/Courier: Comment Intake--Section 1071
Small Business Lending Data Collection, Bureau of Consumer Financial
Protection, 1700 G Street NW, Washington, DC 20552.
Instructions: The Bureau encourages the early submission of
comments. All submissions should include the agency name and docket
number or Regulatory Information Number (RIN) for this rulemaking.
Because paper mail in the Washington, DC area and at the Bureau is
subject to delay, and in light of difficulties associated with mail and
hand deliveries during the COVID-19 pandemic, commenters are encouraged
to submit comments electronically. In general, all comments received
will be posted without change to <a href="https://www.regulations.gov">https://www.regulations.gov</a>. In
addition, once the Bureau's headquarters reopens, comments will be
available for public inspection and copying at 1700 G Street NW,
Washington, DC 20552, on official business days between the hours of 10
a.m. and 5 p.m. Eastern Time. At that time, you can make an appointment
to inspect the documents by telephoning 202-435-7275.
All comments, including attachments and other supporting materials,
will become part of the public record and subject to public disclosure.
Proprietary information or sensitive personal information, such as
account numbers or Social Security numbers, or names of other
individuals, should not be included. Comments will not be edited to
remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Camille Gray, Paralegal Specialist;
Tola Adenuga, Regulatory Implementation and Guidance Specialist;
Tarrian Ellis, Honors Attorney; Jaydee DiGiovanni, Counsel; Kristine M.
Andreassen, Pavitra Bacon, Benjamin Cady, Joseph Devlin, Amy Durant,
Gregory Evans, David Jacobs, Kathryn Lazarev, Lawrence Lee, Kristen
Phinnessee, or Michael Scherzer, Senior Counsels, Office of
Regulations, at 202-435-7700 or <a href="https://reginquiries.consumerfinance.gov/">https://reginquiries.consumerfinance.gov/</a>. If you require this document in an
alternative electronic format, please contact
<a href="/cdn-cgi/l/email-protection#2665607664796745454355554f444f4a4f525f664540564408414950"><span class="__cf_email__" data-cfemail="5a191c0a18051b39393f292933383336332e231a393c2a38743d352c">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Summary of the Proposed Rule
In 2010, Congress passed the Dodd-Frank Act. Section 1071 of that
Act amended ECOA\1\ to require that financial institutions collect and
report to the Bureau certain data regarding applications for credit for
women-owned, minority-owned, and small businesses.\2\ Section 1071's
statutory purposes are to (1) facilitate enforcement of fair lending
laws, and (2) enable communities, governmental entities, and creditors
to identify business and community development needs and opportunities
of women-owned, minority-owned, and small businesses.
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\1\ 15 U.S.C. 1691 et seq.
\2\ Public Law 111-203, tit. X, section 1071, 124 Stat. 1376,
2056 (2010), codified at ECOA section 704B, 15 U.S.C. 1691c-2.
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Section 1071 specifies a number of data points that financial
institutions are required to collect and report, and also provides
authority for the Bureau to require any additional data that the Bureau
determines would aid in fulfilling section 1071's statutory purposes.
Section 1071 also contains a number of other requirements, including
those that address restricting the access of underwriters and other
persons to certain 1071 data; recordkeeping; publication of 1071 data;
and modifications or deletions of data prior to publication in order to
advance a privacy interest.
Section 1071 directs the Bureau to prescribe such rules and issue
such guidance as may be necessary to carry out, enforce, and compile
data pursuant to section 1071, and permits the Bureau to adopt
exceptions to any requirement or to exempt financial institutions from
the requirements of section 1071 as the Bureau deems necessary or
appropriate to carry out the purposes of section 1071. The Bureau is
proposing to add a new subpart B to Regulation B to implement the
requirements of section 1071.\3\ Key aspects of the Bureau's proposal
are summarized below.
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\3\ The Bureau interpreted section 1071 to mean that obligations
for financial institutions to collect, maintain, and submit data
``do not arise until the Bureau issues implementing regulations and
those regulations take effect.'' See Letter from Leonard Kennedy,
General Counsel, CFPB, to Chief Executive Officers of Financial
Institutions under Section 1071 of the Dodd-Frank Act (Apr. 11,
2011), <a href="https://files.consumerfinance.gov/f/2011/04/GC-letter-re-1071.pdf">https://files.consumerfinance.gov/f/2011/04/GC-letter-re-1071.pdf</a>.
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If finalized, the Bureau's proposed rule would create the first
comprehensive database of small business credit applications in the
United States. This would include critical information about women-
owned and minority-owned small businesses to help regulators and the
public identify and address fair lending concerns. The database would
also enable a range of stakeholders to better identify business and
community development needs and opportunities for small businesses,
including women-owned and minority-owned small businesses. Just as the
Bureau works in other ways to help foster fairness and opportunity in
consumer financial services markets for all consumers, the proposed
1071 rule is structured to realize these same goals for the small
business market--for all small businesses within the scope of the rule,
including those that are owned by women and minorities. Research
indicates that minority-owned small businesses face particular
obstacles, as do those that are women-owned, but the current lack of
comprehensive, quantitative data has made it difficult to understand
the extent of these obstacles and address them with responsive
[[Page 56357]]
policy. By shining a light on lending practices in this area, the
Bureau believes that the 1071 data would not only foster a culture of
compliance but bring particular attention to the underserved parts of
the small business market that have traditionally faced the greatest
obstacles to success. In this way, the proposed rule is intended to
help small businesses drive inclusive and equitable growth.
Scope. The Bureau is proposing to require financial institutions to
collect and report 1071 data regarding applications for credit for
small businesses, including those that are owned by women and
minorities. The Bureau is not proposing to require that financial
institutions collect and report data regarding applications for women-
owned and minority-owned businesses that are not small. Because most
existing businesses are small businesses, covering small businesses
necessarily means nearly all women-owned and minority-owned businesses
will also be covered. The Bureau believes that this scope is consistent
with the statute and will allow the rule to carry out section 1071's
purposes without requiring collection of data that would be of limited
utility.
Covered financial institutions. Consistent with language from
section 1071, the Bureau is proposing to define a ``financial
institution'' to include any partnership, company, corporation,
association (incorporated or unincorporated), trust, estate,
cooperative organization, or other entity that engages in any financial
activity. Under the proposed definition, the Bureau's 1071 rule would
apply to a variety of entities that engage in small business lending,
including depository institutions (i.e., banks, savings associations,
and credit unions),\4\ online lenders, platform lenders, community
development financial institutions (both depository and nondepository
institutions), lenders involved in equipment and vehicle financing
(captive financing companies and independent financing companies),
commercial finance companies, governmental lending entities, and
nonprofit nondepository lenders.\5\
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\4\ For purposes of this notice of proposed rulemaking, the
Bureau is using the term depository institution to mean any bank or
savings association defined by the Federal Deposit Insurance Act, 12
U.S.C. 1813(c)(1), or credit union defined pursuant to the Federal
Credit Union Act, 12 U.S.C. 1751 et seq., as implemented by 12 CFR
700.2. The Bureau notes that the Dodd-Frank Act defines a depository
institution to mean any bank or savings association defined by the
Federal Deposit Insurance Act, 12 U.S.C. 1811 et seq.; there, that
term does not encompass credit unions. 12 U.S.C. 5301(18)(A),
1813(c)(1). To facilitate analysis and discussion, the Bureau is
referring to banks and savings associations together with credit
unions as depository institutions throughout this notice, unless
otherwise specified.
\5\ The Bureau's rules, including this proposed rule to
implement section 1071, generally do not apply to motor vehicle
dealers, as defined in section 1029(f)(2) of the Dodd-Frank Act,
that are predominantly engaged in the sale and servicing of motor
vehicles, the leasing and servicing of motor vehicles, or both. 12
U.S.C. 5519.
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The Bureau's proposal uses the term ``covered financial
institution'' to refer to those financial institutions that would be
required to comply with section 1071's data collection and reporting
requirements. The Bureau is proposing that a covered financial
institution would be a financial institution that originated at least
25 covered credit transactions for small businesses in each of the two
preceding calendar years. The Bureau is not proposing an asset-based
exemption threshold for depository institutions, or any other general
exemptions for particular categories of financial institutions.
The Bureau is also proposing to permit creditors that are not
covered financial institutions to voluntarily collect and report data
under section 1071 in certain circumstances.
Covered credit transactions. The Bureau is proposing to require
that covered financial institutions collect and report data regarding
covered applications from small businesses for covered credit
transactions. The Bureau is proposing to define a ``covered credit
transaction'' as one that meets the definition of business credit under
existing Regulation B, with certain exceptions. Loans, lines of credit,
credit cards, and merchant cash advances (including such credit
transactions for agricultural purposes and those that are also covered
by the Home Mortgage Disclosure Act of 1975 (HMDA) \6\) would all be
covered credit transactions within the scope of this proposed rule. The
Bureau is proposing to exclude trade credit, public utilities credit,
securities credit, and incidental credit. Factoring, leases, consumer-
designated credit used for business purposes, and credit secured by
certain investment properties would also not be covered credit
transactions.
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\6\ 12 U.S.C. 2801 et seq.
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Covered applications. The Bureau is proposing to define a ``covered
application''--which would trigger data collection and reporting and
related requirements--as an oral or written request for a covered
credit transaction that is made in accordance with procedures used by a
financial institution for the type of credit requested. This proposed
definition of covered application is largely consistent with the
existing Regulation B definition of that term. However, the Bureau is
also proposing that certain circumstances would not be covered
applications, even if they are considered applications under existing
Regulation B. Specifically, the Bureau is proposing that a covered
application does not include (1) reevaluation, extension, or renewal
requests on an existing business credit account, unless the request
seeks additional credit amounts; or (2) inquiries and prequalification
requests.
Small business definition. The Bureau is proposing to define a
``small business,'' about whose applications for credit data must be
collected and reported, by reference to the definitions of ``business
concern'' and ``small business concern'' as set out in the Small
Business Act \7\ and Small Business Administration (SBA) regulations.
However, in lieu of using the SBA's size standards for defining a small
business concern, the Bureau's proposed definition would look to
whether the business had $5 million or less in gross annual revenue for
its preceding fiscal year. The Bureau is seeking SBA approval for its
alternate small business size standard pursuant to the Small Business
Act.\8\
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\7\ 15 U.S.C. 631 et seq.
\8\ See 15 U.S.C. 632(a)(2)(C).
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Data to be collected and reported. The Bureau's proposal addresses
the data points that must be collected and reported by covered
financial institutions for covered applications from small businesses.
Many of the proposed data points are specifically enumerated in section
1071; for the others, the Bureau is proposing to use the authority
granted by section 1071 to require financial institutions to collect
and report any additional data that the Bureau determines would aid in
fulfilling the purposes of section 1071. Certain of these data points
are or could be collected from the applicant (or otherwise determined
based on information provided or authorized by the applicant); other
data points are based on information solely within the financial
institution's control. The Bureau is proposing that covered financial
institutions maintain procedures to collect applicant-provided data at
a time and in a manner that is reasonably designed to obtain a
response. The Bureau's proposal also addresses what financial
institutions should do if, despite having such procedures in place,
they are unable to obtain certain data from an applicant. A financial
institution would be permitted to rely on statements made by an
[[Page 56358]]
applicant (whether in writing or orally) or information provided by an
applicant when collecting and reporting 1071 data, although for most
data points if the financial institution verifies the information
provided it must report the verified information. The Bureau's proposal
would also permit financial institutions to reuse certain previously
collected data in certain circumstances.
As noted above, the Bureau's proposal includes certain data points
that are, or could be, provided by the applicant. Some data points
specifically relate to the credit being applied for: The credit type
(which includes information on the credit product, types of guarantees,
and loan term); The credit purpose; and the amount applied for. There
are also data points that relate to the applicant's business: A census
tract based on an address or location provided by the applicant; gross
annual revenue for the applicant's preceding full fiscal year; the 6-
digit North American Industry Classification System (NAICS) code
appropriate for the applicant; the number of workers that the applicant
has (i.e., non-owners working for the applicant); the applicant's time
in business; and the number of principal owners of the applicant.
There are also data points that would be provided by the applicant
addressing the demographics of the applicant's ownership: Whether the
applicant is a minority-owned business; whether the applicant is a
women-owned business; and the ethnicity, race, and sex of the
applicant's principal owners. The Bureau refers to these data points
collectively as an applicant's ``protected demographic information.''
The Bureau is proposing that principal owners' ethnicity and race be
collected from applicants using aggregate categories as well as
disaggregated subcategories. The Bureau is proposing to permit
principal owners to self-describe their sex (instead of or in addition
to choosing male and/or female), and is seeking comment on whether and,
if so, how its collection of principal owners' sex should incorporate
sexual orientation and gender identity in light of the recent Supreme
Court decision in Bostock v. Clayton County \9\ and the Bureau's
subsequent ECOA interpretive rule.\10\ If an applicant does not provide
any ethnicity, race, or sex information for any principal owners, the
Bureau is proposing that the financial institution must collect at
least one principal owner's race and ethnicity (but not sex) via visual
observation or surname, but only if the financial institution meets
with any principal owners in person or via electronic media with an
enabled video component. The Bureau is proposing detailed instructions
to assist financial institutions in collecting and reporting
applicants' protected demographic information pursuant to section 1071.
The Bureau is also proposing a sample data collection form, which would
include a required notice to applicants that the financial institution
cannot discriminate on the basis of an applicant's minority- or women-
owned business status or any principal owner's ethnicity, race, or sex.
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\9\ 140 S. Ct. 1731 (2020).
\10\ 86 FR 14363 (Mar. 16, 2021).
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In addition, the Bureau's proposal includes data points that would
be generated or supplied solely by the financial institution. These
data points include, for all applications: A unique identifier for each
application for or extension of credit; the application date; the
application method (i.e., the means by which the applicant submitted
its application); the application recipient (that is, whether the
financial institution or its affiliate received the application
directly, or whether it was received by the financial institution via a
third party); the action taken by the financial institution on the
application; and the action taken date. For denied applications, there
is also a data point for denial reasons. For applications that are
originated or approved but not accepted, there is a data point for the
amount originated or approved, and a data point for pricing information
(which would include, as applicable, interest rate, total origination
charges, broker fees, initial annual charges, additional cost for
merchant cash advances or other sales-based financing, and prepayment
penalties).
Firewall. The Bureau's proposal includes a section to implement the
requirement in section 1071 that certain data collected be shielded
from underwriters and certain other persons; the Bureau refers to this
as the ``firewall.'' An employee or officer of a financial institution
or a financial institution's affiliate that is involved in making any
determination concerning the application would be prohibited from
accessing an applicant's responses to inquiries that the financial
institution makes pursuant to section 1071 regarding whether the
applicant is a minority-owned or women-owned business, and the
ethnicity, race, and sex of the applicant's principal owners.
This prohibition would not apply to an employee or officer,
however, if the financial institution determines that it is not
feasible to limit that employee's or officer's access to an applicant's
responses to the financial institution's inquiries regarding the
applicant's protected demographic information, and the financial
institution provides a notice to the applicant regarding that access.
It would not be feasible to limit access if the financial institution
determines that an employee or officer involved in making any
determination concerning a covered application should have access to
one or more applicants' responses to inquiries regarding protected
demographic information. The notice must be provided to each applicant
whose information will be accessed or, alternatively, the financial
institution could provide the notice to all applicants whose
information could be accessed. The Bureau is proposing sample language
that a financial institution could use in providing this notice.
Reporting data to the Bureau; publication of data by the Bureau;
and privacy considerations. The Bureau is proposing to require that
1071 data be collected on a calendar year basis and reported to the
Bureau on or before June 1 of the following year. Financial
institutions reporting data to the Bureau would be required to provide
certain identifying information about themselves as part of their
submission. The Bureau is proposing to provide technical instructions
for the submission of 1071 data in a Filing Instructions Guide and
related materials.
The Bureau is proposing to make available to the public, on an
annual basis and on the Bureau's website, the data submitted to it by
financial institutions, subject to modifications or deletions made by
the Bureau, at its discretion, to protect privacy interests. To
determine whether and how the Bureau might use its discretion to modify
or delete data prior to publication, the Bureau is proposing a
``balancing test'' that would assess the risks and benefits of public
disclosure. After the Bureau receives at least one full year of 1071
data following the compliance date of the final rule, the Bureau plans
to issue a policy statement in which it would set forth its intended
modifications and deletions. The Bureau is also proposing that the
Bureau's publication of the data would satisfy financial institutions'
statutory obligation to make data available to the public upon request.
Recordkeeping, enforcement, severability, and effective and
compliance dates. The Bureau's proposal addresses issues related to
recordkeeping and to severability of the rule. It also addresses
enforcement of violations of the rule, along with provisions regarding
bona fide errors
[[Page 56359]]
under the rule as well as several safe harbors.
Finally, the Bureau is proposing that its final rule to implement
section 1071 would become effective 90 days after publication in the
Federal Register, though compliance with the rule would not be required
until approximately 18 months after publication in the Federal
Register. The Bureau is also proposing several related transitional
provisions that would permit covered financial institutions to begin
collecting applicants' protected demographic information prior to the
compliance date and would permit financial institutions to use a
different time period to determine whether they will be covered by the
rule as of the compliance date.
II. Background
As discussed above, in 2010, Congress enacted the Dodd-Frank Act.
Section 1071 of the Dodd-Frank Act, which amended ECOA, requires
financial institutions to collect and report to the Bureau data
regarding applications for credit for women-owned, minority-owned, and
small businesses. Section 1071 was adopted for the dual purposes of
facilitating fair lending enforcement and enabling communities,
governmental entities, and creditors to identify business and community
development needs and opportunities of such businesses. Section 1071
complements other Federal efforts to ensure fair lending and to promote
community development for small businesses, including through ECOA, the
Community Reinvestment Act of 1977 (CRA),\11\ and the Community
Development Financial Institutions (CDFI) Fund.\12\
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\11\ 12 U.S.C. 2901 et seq.
\12\ The Riegle Community Development Banking and Financial
Institutions Act of 1994, 12 U.S.C. 4701 et seq., authorized the
Community Development Financial Institution Fund (CDFI Fund). The
CDFI Fund is discussed in more detail in part II.F.2.ii below.
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The collection and subsequent publication of more robust and
granular data regarding credit applications for small businesses,
including those that are women- and minority-owned, will provide much-
needed transparency to the small business lending market. The current
COVID-19 pandemic has shown that transparency is essential,
particularly at a time of crisis, when small businesses, especially
those owned by women and minorities, may be in urgent need of credit in
order to recover from economic shocks.
Furthermore, in the years and decades to come, the collection and
publication of these data will be helpful in identifying potential fair
lending violations and in facilitating the enforcement of anti-
discrimination laws. It will also help governments, community groups,
financial institutions, and other stakeholders to identify
opportunities and gaps in the market, thereby enhancing business and
community development and boosting broad-based economic activity and
growth.
Overview
Small businesses are a cornerstone of the U.S. economy. There were
over 30 million small businesses in the U.S. in 2017, employing almost
half of all private sector employees.\13\ Small businesses,
particularly start-ups, also generated 65 percent of new jobs since
2000.\14\ Small businesses were hit hard by two major shocks in the
last two decades. First, the Great Recession, which began in 2007,
disproportionately affected small businesses.\15\ Between 2007 and
2009, employment at businesses with under 50 employees fell by 10.4
percent, compared with 7.5 percent at larger firms,\16\ while between
2008 and 2011 lending to small firms fell by 18 percent, compared with
9 percent at larger firms.\17\ Small businesses suffered again because
of the COVID-19 pandemic. Around 40 percent of small businesses were
temporarily closed in late March and early April 2020, due primarily to
demand shocks and employee health concerns.\18\ Across the first year
of the pandemic, ``excess'' business establishment exits from the
market, in comparison to exits over the same period from prior years,
numbered up to 200,000.\19\ As of mid-2021, loan approvals (other than
for government emergency programs) still remained low, and some 845,000
non-farm private sector jobs had not yet been recovered.\20\
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\13\ Off. of Advocacy, Small Bus. Admin., 2020 Small Business
Profile (May 2020), <a href="https://cdn.advocacy.sba.gov/content/uploads/2020/06/04144214/2020-Small-Business-Economic-Profile-States-Territories.pdf">https://cdn.advocacy.sba.gov/content/uploads/2020/06/04144214/2020-Small-Business-Economic-Profile-States-Territories.pdf</a> (estimating 31.7 million small businesses in the
United States).
\14\ Off. of Advocacy, Small Bus. Admin., Frequently Asked
Questions About Small Business, at 1 (Oct. 2020), <a href="https://cdn.advocacy.sba.gov/wp-content/uploads/2020/11/05122043/Small-Business-FAQ-2020.pdf">https://cdn.advocacy.sba.gov/wp-content/uploads/2020/11/05122043/Small-Business-FAQ-2020.pdf</a> (SBA OA 2020 FAQs) (small businesses accounted
for 65.1 percent of new jobs since 2000). See generally
Congressional Research Serv., Small Business Administration and Job
Creation (updated June 23, 2021), <a href="https://fas.org/sgp/crs/misc/R41523.pdf">https://fas.org/sgp/crs/misc/R41523.pdf</a> (discussing small business job creation); Jon Haltiwanger
et al., Who Creates Jobs? Small Versus Large Versus Young, 95 Rev.
Econ. Stat. 347, 347-48 (May 2013), <a href="https://direct.mit.edu/rest/article/95/2/347/58100/Who-Creates-Jobs-Small-versus-Large-versus-Young">https://direct.mit.edu/rest/article/95/2/347/58100/Who-Creates-Jobs-Small-versus-Large-versus-Young</a> (finding that young firms, which are generally small,
contribute disproportionately to both gross and net job creation).
\15\ Jason Dietrich et al., Bureau of Consumer Fin. Prot., Data
Point: Small Business Lending and the Great Recession, at 9 (Jan.
23, 2020), <a href="https://files.consumerfinance.gov/f/documents/cfpb_data-point_small-business-lending-great-recession.pdf">https://files.consumerfinance.gov/f/documents/cfpb_data-point_small-business-lending-great-recession.pdf</a> (finding that small
business lending fell sharply during the Great Recession and
recovered slowly, still not reaching pre-Recession levels by 2017).
\16\ Ay[scedil]eg[uuml]l [Scedil]ahin et al., Fed. Reserve Bank
of N.Y., Current Issues in Economics & Finance, Why Small Businesses
Were Hit Harder by the Recent Recession, at 1 (Vol. 17, No. 4,
2011), <a href="https://www.newyorkfed.org////_issues/ci17-4.pdf">https://www.newyorkfed.org////_issues/ci17-4.pdf</a>.
\17\ Rebel A. Cole, Off. of Advocacy, Small Bus. Admin, How Did
the Financial Crisis Affect Small Business Lending in the United
States?, at 2 (Nov. 2012), <a href="https://www.microbiz.org/content/ploads//04/SmallBizLending-and-FiscalCrisis.pdf">https://www.microbiz.org/content/ploads//04/SmallBizLending-and-FiscalCrisis.pdf</a>.
\18\ Alexander W. Bartik et al., The Impact of COVID-19 on Small
Business Outcomes and Expectations, 117 Proc. Nat'l Acad. Sci.
17656, 17656 (July 2020), <a href="https://www.pnas.org/content/pnas/117/30/17656.full.pdf">https://www.pnas.org/content/pnas/117/30/17656.full.pdf</a>.
\19\ Leland D. Crane et al., Bd. of Governors of the Fed.
Reserve Sys., Finance and Economics Discussion Series, 2020-089,
Business Exit During the COVID-19 Pandemic: Non-Traditional Measures
in Historical Context, at 4 (2020), <a href="https://www.federalreserve.gov/econres/feds/files/2020089r1pap.pdf">https://www.federalreserve.gov/econres/feds/files/2020089r1pap.pdf</a> (estimating excess establishment
exits and analyzing other estimates of small business exits during
the pandemic). The paper defines ``exit'' as permanent shutdown and
calculates ``excess'' exits by comparing the number of exits during
the 12-month period from March 2020 to February 2021 with previous
years. Id. at 2-4.
\20\ ADP Research Inst., ADP National Employment Report (May
2021), <a href="https://adpemploymentreport.com////May-2021.aspx">https://adpemploymentreport.com////May-2021.aspx</a> (non-farm
private sector jobs as of June 2021 as compared to Feb. 2020);
Biz2Credit, Biz2Credit Small Business Lending Index Finds April 2021
Non-PPP Loan Approval Rates Move Little for All Types of Lenders
(Apr. 2021), <a href="https://www.biz2credit.com/business-lending-index/april-2021">https://www.biz2credit.com/business-lending-index/april-2021</a> (approvals as of May 2021).
---------------------------------------------------------------------------
During the last two decades, the small business lending landscape
has also transformed. Traditional providers--namely banks--
consolidated, leading to branch closures. The number of banks in the
U.S. has declined from over 18,000 in 1986 to under 5,200 today and the
number of branches declined by 14 percent from 2009 to 2020.\21\
Meanwhile, new providers and products, such as fintechs and merchant
cash advances (MCAs), have become increasingly prevalent in the small
business lending market. Financing by MCA providers is estimated to
have increased from $8.6 billion in volume during 2014 to $15.3 billion
in 2017.\22\ From 2017 to 2019, the volume may
[[Page 56360]]
have increased further to $19 billion.\23\ Meanwhile, financing by
fintechs \24\ is estimated to have increased from $1.4 billion \25\ in
outstanding balances in 2013 to approximately $25 billion \26\ in 2019.
---------------------------------------------------------------------------
\21\ Congressional Research Serv., Small Business Credit Markets
and Selected Policy Issues, at 6 (Aug. 20, 2019), <a href="https://fas.org/sgp//misc/R45878.pdf">https://fas.org/sgp//misc/R45878.pdf</a> (decline since 1986); Bruce C. Mitchell et al.,
Nat'l Cmty. Reinvestment Coal., Relationships Matter: Small Business
and Bank Branch Locations, <a href="https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/">https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/</a> (last visited Aug. 24,
2021) (branch closures).
\22\ PYMNTS, How Long Can MCAs Avoid the `Loan' Label? (Jan. 20,
2016), <a href="https://www.pymnts.com/in-depth/2016/how-long-can-mcas-avoid-the-loan-label/">https://www.pymnts.com/in-depth/2016/how-long-can-mcas-avoid-the-loan-label/</a>.
\23\ Paul Sweeney, Gold Rush: Merchant Cash Advances are Still
Hot, deBanked (Aug. 18, 2019), <a href="https://debanked.com/2019/08/gold-rush-merchant-cash-advances-are-still-hot/">https://debanked.com/2019/08/gold-rush-merchant-cash-advances-are-still-hot/</a>. Although the article
does not specify one way or the other, estimates by the underlying
source, Bryant Park Capital, appear to reference origination volumes
rather than outstanding balances. See Nimayi Dixit, S&P Global
Market Intelligence, Payment Fintechs Leave Their Mark On Small
Business Lending (Aug. 28, 2018), <a href="https://www.spglobal.com/marketintelligence/en/news-insights/research/payment-fintechs-leave-their-mark-on-small-business-lending">https://www.spglobal.com/marketintelligence/en/news-insights/research/payment-fintechs-leave-their-mark-on-small-business-lending</a>. Depending on credit multiplier
effects, the value of annual origination volumes could be smaller or
greater than outstanding balances. Without information on
outstanding balances and for the purposes of calculating a market
size for small business financing in 2019, the Bureau assumes in
this paper a 1:1 ratio between annual origination volumes and
outstanding balances for MCA products. See part II.D below for
discussion of credit multiplier effects and for market size
calculations for MCA and other small business financing products in
2019.
\24\ Fintechs are defined as ``technology companies providing
alternatives to traditional banking services, most often exclusively
in an online environment,'' and may overlap in part with other
categories of financial institution, such as commercial finance
companies and/or providers of specialized products, including
factoring and MCAs. Brett Barkley & Mark Schweitzer, The Rise of
Fintech Lending to Small Businesses: Businesses' Perspectives on
Borrowing, 17 Int'l J. Cent. Banking 35, 35-36 (Mar. 2021), <a href="https://www.ijcb.org/journal/ijcb21q1a2.pdf">https://www.ijcb.org/journal/ijcb21q1a2.pdf</a>.
\25\ Id. (citing Katie Darden et al., S&P Global Market
Intelligence, 2018 US Fintech Market Report, at 5, <a href="https://www.spglobal.com/marketintelligence/en/documents/2018-us-fintech-market-report.pdf">https://www.spglobal.com/marketintelligence/en/documents/2018-us-fintech-market-report.pdf</a> (2018 US Fintech Market Report)). This figure
annualizes $121 million in estimated 2013 quarterly originations to
$484 million in annual originations and scales up to estimated
outstanding balances using the ratio between the FFIEC Call Report
and the CRA data discussed in part II.D below.
\26\ 2018 US Fintech Market Report at 6. This figure scales up
$9.3 billion in estimated 2019 credit originations for small to
medium sized enterprise (SME) borrowers to outstanding balances
using the ratio methodology discussed in part II.D below.
---------------------------------------------------------------------------
Both recent economic shocks and changes in patterns of small
business financing have had fair lending and community development
implications. In terms of the effect of economic shocks, data suggest
that women-owned and minority-owned small businesses were impacted
disproportionately by the economic crises of the last two decades.\27\
Data further suggest that women-owned and minority-owned small
businesses, compared to other small businesses, had fewer cash reserves
and faced steeper hurdles in accessing credit that would have allowed
them to better weather these crises.\28\
---------------------------------------------------------------------------
\27\ See part II.E below.
\28\ Id.
---------------------------------------------------------------------------
Regarding trends in the small business financing landscape, the
shift away from traditional providers of small business credit toward
newer types of providers gives rise to both potential harm and
opportunity. In terms of potential harms, bank closures may have made
it more difficult for small businesses, particularly women-owned and
minority-owned small businesses, to access credit and remain open--
particularly in low- and moderate-income areas and rural communities.
Newer providers, often offering newer products, have less experience
complying with both Federal and State lending laws and regulations.
Additionally, they may use algorithms and artificial intelligence (AI),
which may create or heighten ``risks of unlawful discrimination,
unfair, deceptive, or abusive acts or practices . . . or privacy
concerns.'' \29\ In addition, opaque product terms and high interest
rates could trap business owners in cycles of debt.
---------------------------------------------------------------------------
\29\ 86 FR 16837, 16839 (Mar. 31, 2021).
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In terms of opportunity, innovative products and lending models,
including the use of AI, may yield benefits of more accurate, lower-
cost, and faster underwriting, as well as expanded credit access for
small businesses that may not have obtained credit under traditional
credit underwriting approaches.\30\ Specifically, newer providers and
approaches may permit those with low or nonexistent personal or
business credit scores--including women and minorities who own or seek
to start small businesses but on average have relatively lower personal
credit scores than male and white business owners \31\--to more easily
access credit.\32\ Non-traditional credit providers may help offset
decreases in lending associated with the closure of bank branches. For
instance, fintechs may help provide financing to small businesses in
rural communities that lack bank branches.
---------------------------------------------------------------------------
\30\ Id. See also Patrice Ficklin et al., Bureau of Consumer
Fin. Prot., Innovation Spotlight: Providing Adverse Action Notices
When Using AI/ML Models (July 7, 2020), <a href="https://www.consumerfinance.gov/about-us/blog/innovation-spotlight-providing-adverse-action-notices-when-using-ai-ml-models/">https://www.consumerfinance.gov/about-us/blog/innovation-spotlight-providing-adverse-action-notices-when-using-ai-ml-models/</a>
(discussing potential benefits and risks from financial institutions
using AI in credit underwriting and other areas).
\31\ Geng Li, Bd. of Governors of the Fed. Reserve Sys., FEDS
Notes: Gender-Related Differences in Credit Use and Credit Scores
(June 22, 2018), <a href="https://www.federalreserve.gov/econres/notes/feds-notes/gender-related-differences-in-credit-use-and-credit-scores-20180622.htm">https://www.federalreserve.gov/econres/notes/feds-notes/gender-related-differences-in-credit-use-and-credit-scores-20180622.htm</a> (finding that single women on average have lower credit
scores than single men); Alicia Robb, Off. of Advocacy, Small Bus.
Admin., Minority-Owned Employer Businesses and their Credit Market
Experiences in 2017, at 4 (July 22, 2020), <a href="https://cdn.advocacy.sba.gov/wp-content/uploads/2020/07/22172533/Minority-Owned-Employer-Businesses-and-their-Credit-Market-Experiences-in-2017.pdf">https://cdn.advocacy.sba.gov/wp-content/uploads/2020/07/22172533/Minority-Owned-Employer-Businesses-and-their-Credit-Market-Experiences-in-2017.pdf</a> (finding that Black and Hispanic small business borrowers
are disproportionately denied credit or discouraged from applying
for credit on the basis of their credit score).
\32\ See Jessica Battisto et al., Who Benefited from PPP Loans
by Fintech Lenders?, Liberty Street Economics (May 27, 2021),
<a href="https://libertystreeteconomics.newyorkfed.org/2021/05/who-received-ppp-loans-by-fintech-lenders.html">https://libertystreeteconomics.newyorkfed.org/2021/05/who-received-ppp-loans-by-fintech-lenders.html</a> (showing that fintech lenders were
an important source of credit for Black owners during the COVID-19
pandemic).
---------------------------------------------------------------------------
The precise impacts of these broader trends are not well understood
at present because there are no comprehensive, comparable, and
application-level data across the fragmented and complex small business
lending market. Some small business lending data exist, provided mostly
by Federal regulators, but available data are incomplete in certain
ways. Some do not include lending by certain categories of
institutions, such as smaller depository institutions. And none include
lending by nondepository institutions, which comprises almost half of
all small business financing.\33\
---------------------------------------------------------------------------
\33\ The Bureau estimates that nondepository private business
financing totaled approximately $550 billion out of around $1.2
trillion in total private outstanding balances in 2019 (47 percent).
This $550 billion figure includes estimated financing by fintechs
(around $25 billion), commercial finance companies (around $160
billion), nondepository CDFIs (around $1.5 billion), MCA providers
(around $19 billion), factors (around $100 billion), equipment
leasing providers (around $160 billion), nondepository mortgage
lenders originating loans for 5+ unit residential developments
(around $30 billion), and non-financial trade creditors (around $50
billion). There may additionally be lending by equipment and vehicle
dealers originating loans in their own name that is not captured
here. Public lenders include the Small Business Association (SBA),
the Federal Housing Association (FHA), Fannie Mac and Freddie Mac,
and the Farm Credit System (FCS), with public lending totaling
around $210 billion in traditional lending programs plus $1 trillion
in emergency COVID-19 SBA lending programs. See part II.D below for
methodology and sources regarding market size estimates for each
lending category.
---------------------------------------------------------------------------
The datasets that do exist both over- and underestimate small
business lending in certain respects by including small dollar loans to
non-small businesses and by excluding larger loans to small
businesses.\34\ Further, these datasets all concern originated loans;
they do not include information on applications that do not result in
originated loans. Nor do they generally include borrower demographics.
Other public, private, and nonprofit datasets offer only partial
snapshots of particular areas of the market. Finally, much of the
publicly available data are aggregated, which does not permit more
granular, loan- or application-level analysis that
[[Page 56361]]
would facilitate fair lending or business and community development
analysis by stakeholders other than those that collected the data. See
part II.B below for a detailed discussion on existing data on small
business financing.
---------------------------------------------------------------------------
\34\ See part II.B below.
---------------------------------------------------------------------------
The remainder of this part II focuses on several broad topics that
explain, in more detail, the need for the small business lending data
that the proposed rule to implement section 1071 would provide: (A) The
role of small businesses in the U.S. economy; (B) existing data on
small business financing; (C) the landscape of small business
financing; (D) estimating the size of the small business financing
market despite limited data; (E) the particular challenges faced by
women-owned and minority-owned small businesses; and (F) the purposes
and impact of section 1071.
A. Small Businesses in the United States
Small businesses are an important, dynamic, and widely diverse part
of the U.S. economy. They are critical to employment, innovation, and
economic growth and stability, both overall and specifically for
minority and women entrepreneurs.
The Small Business Act, as implemented by the SBA, defines a small
business using size standards that generally hinge on the average
number of employees or average annual receipts of the business concern
and are customized industry by industry across 1,057 6-digit North
American Industry Classification System (NAICS) codes.\35\ Size
standards based on average number of employees are used in all
industries in the manufacturing and wholesale trade sectors, as well as
in certain industries across a variety of other sectors as well.
Employee-based size standards range from 100 (used almost entirely in
certain industries within the wholesale trade sector) to 1,000 (used in
industries across a variety of sectors including, for example,
petroleum refineries, automobile manufacturing, and greeting card
publishers).\36\ Size standards based on average annual receipts are
used in nearly all other industries, and range from $1 million (used in
most industries in the crop production and animal production and
aquaculture subsectors) to $41.5 million (used in industries across a
variety of sectors including, for example, passenger car leasing,
television broadcasting, and general medical and surgical
hospitals).\37\
---------------------------------------------------------------------------
\35\ See Small Bus. Admin., Table of Small Business Size
Standards Matched to North American Industry Classification System
Codes (effective Aug. 19, 2019), <a href="https://www.sba.gov/sites/default/files/2019-08/SBA%20%20%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf">https://www.sba.gov/sites/default/files/2019-08/SBA%20%20%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf</a>.
\36\ See id.
\37\ A small number of industries use a size standard based on a
metric other than average annual receipts or average number of
employees. For example, the commercial banking industry (NAICS
522110) is subject to an asset-based size standard. See id.
---------------------------------------------------------------------------
Simpler definitions of what constitutes a small business are used
in certain contexts. For example, in certain annual research releases
the SBA's Office of Advocacy defines a small business as one that has
fewer than 500 employees.\38\ According to the Office of Advocacy, and
based on this definition of a small business, there are 31.7 million
such businesses in the U.S. that represent 99.9 percent of all U.S.
firms and employ over 60 million Americans.\39\ Six million of these
small businesses have paid employees, while 25.7 million are non-
employer businesses (i.e., the owner(s) are the only people involved in
the business).\40\ From 2000 to 2019, small businesses, particularly
young businesses and start-ups, created 10.5 million net new jobs in
the U.S., while large businesses created 5.6 million.\41\
---------------------------------------------------------------------------
\38\ See SBA OA 2020 FAQs at 1.
\39\ See id.
\40\ See id.
\41\ See id.; see also Haltiwanger et al., 95 Rev. Econ. Stat.
at 347-48 (finding that young firms, which are generally small,
contribute disproportionately to both gross and net job creation).
---------------------------------------------------------------------------
Nearly one third of all businesses are minority-owned and more than
one third are women-owned, though minorities and women own a smaller
share of employer firms. As of 2018, minorities owned over one million
employer firms in the U.S. (amounting to 18.3 percent of all employer
firms) \42\ and, as of 2017, approximately 8.2 million non-employer
firms.\43\ Likewise, as of 2018, women owned about 1.1 million employer
firms (19.9 percent of all employer firms) \44\ and, as of 2017,
approximately 10.6 million non-employer firms.\45\
---------------------------------------------------------------------------
\42\ See Press Release, U.S. Census Bureau, Annual Business
Survey Release Provides Data on Minority-Owned, Veteran-Owned and
Women-Owned Businesses (Jan. 28, 2021), <a href="https://www.census.gov/newsroom/press-releases//business-survey.html">https://www.census.gov/newsroom/press-releases//business-survey.html</a>.
\43\ Minority Bus. Dev. Agency, U.S. Dep't of Com., The Number
of Minority Nonemployer Firms Grew by Nearly 17% between 2014 and
2017 (Dec. 18, 2020), <a href="https://www.mbda.gov/news/press-releases/2020/12/the-number-of-minority-nonemployer">https://www.mbda.gov/news/press-releases/2020/12/the-number-of-minority-nonemployer</a> (stating that the nearly 8.2
million minority non-employer firms in the U.S. generated $279.3
billion in revenues in 2017, and grew in number at four times the
rate of non-minority non-employer firms between 2014 and 2017). See
also SBA OA 2020 FAQs at 3 (showing over 7.6 million minority-owned
non-employer firms as of 2016).
\44\ See Press Release, U.S. Census Bureau, Annual Business
Survey Release Provides Data on Minority-Owned, Veteran-Owned and
Women-Owned Businesses (Jan. 28, 2021), <a href="https://www.census.gov/newsroom/press-releases//business-survey.html">https://www.census.gov/newsroom/press-releases//business-survey.html</a>.
\45\ See Press Release, Nat'l Women's Bus. Council, NWBC Shares
2017 Nonemployer Statistics by Demographics Estimates for Women-
Owned Businesses (Dec. 17, 2020), <a href="https://www.nwbc.gov/2020/12/17/nwbc-shares-2017-nonemployer-statistics-by-demographics-estimates-for-women-owned-businesses/">https://www.nwbc.gov/2020/12/17/nwbc-shares-2017-nonemployer-statistics-by-demographics-estimates-for-women-owned-businesses/</a> (also stating that these 10.6 million
non-employer firms generate $286.1 billion in revenue, and that
nearly half of all women-owned non-employer firms generate less than
$10,000 in annual receipts, while only 0.05 percent generate $1
million or more in revenue).
---------------------------------------------------------------------------
Businesses are legally structured in several ways. In 2017, 87
percent of non-employer businesses were sole proprietorships, which
means that the business is not distinguishable from the owner for tax
and legal purposes; the owner receives profits directly but is also
legally responsible for the business's obligations.\46\ Seven percent
of non-employer businesses were partnerships, which can be structured
to limit the personal liability of some or all owners; limited partners
may exchange control for limited liability, while general partners that
run the business may remain personally liable.\47\ Six percent of non-
employer businesses were structured as corporations--4.6 percent are S-
corporations and 1.5 percent are C-corporations--which are independent
legal entities owned by shareholders who are not personally liable for
the corporation's obligations.\48\ In 2017, most small employer
businesses were corporations, with 50.5 percent choosing to be S-
corporations and 16.8 percent preferring C-corporation status, although
sole proprietorship and partnership structures remained relatively
popular at 12.9 percent and 11.8 percent respectively. By contrast,
74.2 percent of large employer businesses chose to be C-corporations,
with 9.3 percent preferring a partnership structure and 8.1 percent S-
corporation status.\49\
---------------------------------------------------------------------------
\46\ See SBA OA 2020 FAQs at 3.
\47\ Id. at 4.
\48\ Id.
\49\ Id.
---------------------------------------------------------------------------
Small businesses are particularly important in specific sectors of
the economy. In 2016, in the services sector, small businesses supplied
45 percent of 19.7 million healthcare and social services jobs, over 60
percent of 13.7 million accommodation and food services jobs, and over
80 percent of 6.3 million construction jobs.\50\ In the same year, in
manufacturing, small businesses made up 44 percent out of 11.6 million
[[Page 56362]]
jobs.\51\ Finally, in 2016, small family farms totaled 96 percent out
of 2.2 million farms,\52\ and small businesses provided over 80 percent
of agriculture, forestry, and fishing and hunting jobs out of
161,000.\53\ As such, the financial health of small businesses is
essential to the U.S. economy, especially to the supply of critical and
basic goods and services--from producing food to serving it at
restaurants, and from home building to healthcare.
---------------------------------------------------------------------------
\50\ See Off. of Advocacy, Small Bus. Admin., 2019 Small
Business Profile (Apr. 2019), <a href="https://cdn.advocacy.sba.gov/wp-content/uploads/2019/04/23142719/2019-Small-Business-Profiles-US.pdf">https://cdn.advocacy.sba.gov/wp-content/uploads/2019/04/23142719/2019-Small-Business-Profiles-US.pdf</a>
(2019 Small Business Profile).
\51\ Id. at 3.
\52\ Nat'l Inst. of Food & Agric., U.S. Dep't of Agric., Family
Farms, <a href="https://nifa.usda.gov/family-farms">https://nifa.usda.gov/family-farms</a> (last visited July 26,
2021) (classifying family farms as any farm organized as a sole
proprietorship, partnership, or family corporation. Family farms
exclude farms organized as non-family corporations or cooperatives,
as well as farms with hired managers.).
\53\ 2019 Small Business Profile at 3.
---------------------------------------------------------------------------
Small businesses have been especially hard-hit by the COVID-19
pandemic. At a low point in the pandemic in April 2020, 20 percent of
self-employed workers had temporarily exited the labor market.\54\
Industries in which small businesses played a large role have been
particularly impacted. For example, comparing April 2020 with April
2019, employment declined by almost 50 percent in the leisure and
hospitality industries (also declining by 50 percent among food
services and drinking establishments within the leisure and hospitality
industry), in which small businesses employ 60 percent of workers.\55\
---------------------------------------------------------------------------
\54\ Daniel Wilmoth, Off. of Advocacy, Small Bus. Admin., The
Effects of the COVID-19 Pandemic on Small Businesses (Issue Brief
No. 16) (Mar. 2021), <a href="https://cdn.advocacy.sba.gov/wp-content/uploads/2021/03/02112318/COVID-19-Impact-On-Small-Business.pdf">https://cdn.advocacy.sba.gov/wp-content/uploads/2021/03/02112318/COVID-19-Impact-On-Small-Business.pdf</a>.
\55\ Id. By August 2021, many of these jobs had since returned
as mandatory closure orders ended and the economy began to recover.
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B. Existing Data on Small Business Lending
While small businesses are a critical part of the U.S. economy and
require financial support, it is still true, as it was in 2017 when the
Bureau published its White Paper on small business lending, that it is
not possible with current data to confidently answer basic questions
regarding the state of small business lending. This limitation is
especially the case with regard to the race, sex, and ethnicity of
small business owners, applications as opposed to originations, and for
small business financing products that are not currently reported in
Call Report data.\56\
---------------------------------------------------------------------------
\56\ Bureau of Consumer Fin. Prot., Key dimensions of the small
business lending landscape, at 39-40 (May 2017), <a href="https://files.consumerfinance.gov/f/documents/201705_cfpb_Key-Dimensions-Small-Business-Lending-Landscape.pdf">https://files.consumerfinance.gov/f/documents/201705_cfpb_Key-Dimensions-Small-Business-Lending-Landscape.pdf</a> (White Paper).
---------------------------------------------------------------------------
Data on small business lending are fragmented, incomplete, and not
standardized, making it difficult to conduct meaningful comparisons
across products and over time. This hinders attempts by policymakers
and other stakeholders to understand the size, shape, and dynamics of
the small business lending marketplace, including the interaction of
supply and demand, as well as potentially problematic lending
practices, gaps in the market, or trends in funding that may be holding
back some communities.\57\ For example, absent better data, it is hard
to determine if relatively lower levels of bank loans to small
businesses in the decade before the pandemic began were reflective of a
net relative decline in lending to small businesses as compared to
large businesses or rather a shift within small business lending from
banks to alternative lenders.\58\ To the extent there may have been a
relative decline, it is difficult to assess if that decline affected
certain types of small businesses more than others, including women-
owned and minority-owned small businesses.\59\
---------------------------------------------------------------------------
\57\ While Call Report and CRA data provide some indication of
the level of supply of small business credit, the lack of data on
small business credit applications makes demand for credit by small
businesses more difficult to assess, including with respect to local
markets or protected classes.
\58\ Rebel A. Cole, Off. of Advocacy, Small Bus. Admin., How Did
Bank Lending to Small Business in the United States Fare After the
Financial Crisis?, at 26 (Jan. 2018), <a href="https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf">https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf</a> (showing a decline in bank loans to small
businesses from 2008 to 2015 from $710 billion to $600 billion). The
level of bank lending to small businesses has recovered somewhat
since a trough in 2012-13 that represented the lowest amount of
lending since 2005. Fed. Deposit Ins. Corp., <a href="https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx">https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx</a> (last visited July 22, 2021).
\59\ White Paper at 40.
---------------------------------------------------------------------------
The primary sources of information on lending by depository
institutions are the Federal Financial Institutions Examination Council
(FFIEC) and National Credit Union Administration (NCUA) Consolidated
Reports of Condition and Income (Call Reports), as well as reporting
under the CRA. Under the FFIEC and CRA reporting regimes, small loans
to businesses of any size are used in whole or in part as a proxy for
loans to small businesses. The FFIEC Call Report captures banks'
outstanding number and amount of small loans to businesses (that is,
loans originated under $1 million to businesses of any size; small
loans to farms are those originated under $500,000).\60\ The CRA
requires banks and savings associations with assets over a specified
threshold to report loans in original amounts of $1 million or less to
businesses; reporters are asked to indicate whether the borrower's
gross annual revenue is $1 million or less, if they have that
information.\61\ The NCUA Call Report captures data on all loans over
$50,000 to members for commercial purposes, regardless of any indicator
about the business's size.\62\ There are no similar sources of
information about lending to small businesses by nondepository
institutions. The SBA also releases data concerning its loan programs,
but these typically do not include demographic information, and this
covers only a small portion of the overall small business financing
market.
---------------------------------------------------------------------------
\60\ See Fed. Fin. Insts. Examination Council, Reporting Forms
31, 41, and 51 (last modified Mar. 16, 2021), <a href="https://www.ffiec.gov/ffiec_report_forms.htm">https://www.ffiec.gov/ffiec_report_forms.htm</a> (FFIEC Call Report).
\61\ See Fed. Fin. Insts. Examination Council, A Guide to CRA
Data Collection and Reporting, at 11, 13 (2015), <a href="https://www.ffiec.gov/cra/pdf/2015_CRA_Guide.pdf">https://www.ffiec.gov/cra/pdf/2015_CRA_Guide.pdf</a> (2015 FFIEC CRA Guide).
Small business loans are defined for CRA purposes as loans whose
original amounts are $1 million or less and that were reported on
the institution's Call Report or Thrift Financial Report as either
``Loans secured by nonfarm or nonresidential real estate'' or
``Commercial and industrial loans.'' Small farm loans are defined
for CRA purposes as loans whose original amounts are $500,000 or
less and were reported as either ``Loans to finance agricultural
production and other loans to farmers'' or ``Loans secured by
farmland.'' Id. at 11. Beginning in 2023, national banks supervised
by the OCC with assets greater than $2.5 billion will be required to
report loans of $1.6 million or less and indicate whether the
borrower's gross annual review is $1.6 million or less. See 85 FR
34734 (June 5, 2020).
\62\ See Nat'l Credit Union Admin., Call Report Form 5300 (June
2020), <a href="https://www.ncua.gov/files/publications/regulations/form-5300-june-2020.pdf">https://www.ncua.gov/files/publications/regulations/form-5300-june-2020.pdf</a>.
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These public data sources provide some of the most extensive
information currently available on small business lending. However,
they suffer from four material limitations, namely that the data
capture only parts of the market, are published at a high level of
aggregation, do not permit detailed analysis across the markets, and
lack standardization across different agencies.
First, these datasets exclude entire categories of lenders. For
example, banks under $1.322 billion in assets do not have to report
under the CRA.\63\ The FFIEC and NCUA Call Reports and CRA data do not
include lending by nondepository financial institutions, which the
Bureau estimates to represent 40 percent of the small business
financing market and is rapidly growing.\64\
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\63\ Fed. Fin. Insts. Examination Council, Community
Reinvestment Act 2021 Reporting Criteria, <a href="https://www.ffiec.gov/cra/reporter21.htm">https://www.ffiec.gov/cra/reporter21.htm</a> (last visited Aug. 5, 2021).
\64\ Nondepository lending is estimated to total approximately
$550 billion out of $1.4 trillion in total lending, excluding $1
trillion in COVID-19 emergency program lending. See part II.D below
(providing a detailed breakdown and methodology of estimates across
lending products).
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[[Page 56363]]
Second, Federal agencies publish summary data at a high level in a
manner that does not facilitate independent analysis by other agencies
or stakeholders. The FFIEC and NCUA Call Reports and the CRA data are
all available at a higher level of aggregation than loan-level,
limiting fair lending and detailed geographic analyses since race, sex,
and ethnicity as well as business location data are rarely disclosed.
Third, the detailed data collected by these Federal sources have
significant limitations as well, preventing any analysis into certain
issues or types of borrowers, even by the regulators possessing these
data. Neither Call Report nor CRA data include applications, which
limits insights into any potential discrimination or discouragement in
application processes as well as into the interaction between credit
supply and demand. The Call Report and CRA data separately identify
loans of under $1 million in value, and CRA data also identify loans to
businesses with annual revenues of $1 million or less.\65\ However, the
Call Report definition of small business loans as those with a loan
size of $1 million or less at origination is both overinclusive, as it
counts small loans to businesses of all sizes, and underinclusive, as
it excludes loans over $1 million made to small businesses. Credit
unions report any loans under $50,000 as consumer loans and not as
commercial loans,\66\ potentially excluding from measurement an
important source of funding for many small businesses, particularly the
smallest and often most underserved.
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\65\ Fed. Fin. Insts. Examination Council, Schedule RC-C, Part
II Loans to Small Businesses and Farms, at 1, <a href="https://www.fdic.gov/regulations/resources/call/crinst-031-041/2017/2017-03-rc-c2.pdf">https://www.fdic.gov/regulations/resources/call/crinst-031-041/2017/2017-03-rc-c2.pdf</a>
(detailing the Call Report loan size threshold of $1 million at
origination for loans to small businesses); 2015 FFIEC CRA Guide at
11 (detailing the CRA size thresholds of $1 million both for loan
amount at origination and for revenue of small business borrowers).
\66\ Nat'l Credit Union Admin., Call Report Form 5300
Instructions, at 26 (effective Mar. 31, 2021), <a href="https://www.ncua.gov/files/publications/regulations/call-report-instructions-march-2021.pdf">https://www.ncua.gov/files/publications/regulations/call-report-instructions-march-2021.pdf</a>.
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Finally, the Federal sources of small business lending data are not
standardized across agencies and cannot be easily compared. For
example, the FFIEC Call Report collects small loans to businesses as a
proxy for small business lending, whereas the NCUA Call Report collects
loans to members for commercial purposes above $50,000 but with no
upper limit. The loan-level data for the Paycheck Protection Program
(PPP) offer an unprecedented level of insight into small business
lending, but this dataset is a one-off snapshot into the market for a
specific lending program at an acute moment of crisis and is also
limited in utility by relatively low response levels to demographic
questions concerning borrowers.\67\
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\67\ Zachary Warmbrodt, Tracking the Money: Bid to Make Business
Rescue More Inclusive Undercut by Lack of Data, Politico (Mar. 2,
2021), <a href="https://www.politico.com/news/2021/03/02/businesses-inclusive-coronavirus-relief-money-data-472539">https://www.politico.com/news/2021/03/02/businesses-inclusive-coronavirus-relief-money-data-472539</a> (reporting that 75
percent of PPP recipients did not report their ethnicity and 58
percent did not reveal their gender).
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The Federal government also conducts and releases a variety of
statistics, surveys, and research reports on small business lending
through the member banks for the Federal Reserve System, the FDIC, CDFI
Fund, and the U.S. Census Bureau. These data sources offer insights
into broad trends and specific small business lending issues but are
less useful for detailed fair lending analyses or identification of
specific areas, industries, or demographic groups being underserved.
Periodic changes in survey methodology and questions can also limit
comparability and the ability to track developments over time.
There are also a variety of non-governmental data sources, issued
by both private and nonprofit entities, that cover small businesses
and/or the small business financing market. These include datasets and
surveys published by commercial data and analytics firms, credit
reporting agencies, trade associations, community groups, and academic
institutions. Certain of these data sources are publicly available and
track specific topics, such as small business optimism,\68\ small
business employment,\69\ rates of small business credit application
approvals,\70\ small business lending and delinquency levels,\71\ and
rates of small business closure.\72\ Other databases have more
granularity and provide detailed information on individual businesses,
including revenue, credit utilization, industry, and location.\73\
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\68\ Nat'l Fed'n of Indep. Bus., Small Business Optimism Index
(June 2021), <a href="https://www.nfib.com/surveys/small-business-economic-trends/">https://www.nfib.com/surveys/small-business-economic-trends/</a>.
\69\ ADP, Employment Reports, <a href="https://adpemploymentreport.com/">https://adpemploymentreport.com/</a>
(last visited July 22, 2021).
\70\ Biz2Credit, Biz2Credit Small Business Lending Index,
<a href="https://www.biz2credit.com/small-business-lending-index">https://www.biz2credit.com/small-business-lending-index</a> (last
visited July 27, 2021).
\71\ PayNet, Small Business Lending Index, <a href="https://sbinsights.paynetonline.com/lending-activity/">https://sbinsights.paynetonline.com/lending-activity/</a> (last visited July 27,
2021).
\72\ Opportunity Insights Economic Tracker, <a href="https://tracktherecovery.org/">https://tracktherecovery.org/</a> (last visited July 27, 2021). The Opportunity
Insights Economic Tracker and similar data sources may materially
overestimate the number of business closures by not controlling for
attrition in the small business client base of data providers. See
Leland D. Crane et al., Bd. of Governors of the Fed. Reserve Sys.,
Finance and Economics Discussion Series, 2020-089, Business Exit
During the COVID-19 Pandemic: Non-Traditional Measures in Historical
Context, at 21-22 (2020), <a href="https://www.federalreserve.gov/econrest/feds/files2020089r1pap.pdf">https://www.federalreserve.gov/econrest/feds/files2020089r1pap.pdf</a>.
\73\ See, e.g., Dun & Bradstreet, <a href="https://www.dnb.com/">https://www.dnb.com/</a> (data
provider and credit reporter); Data Axle, <a href="https://www.data-axle.com/">https://www.data-axle.com/</a>
(data provider); Equifax, <a href="https://www.equifax.com/business/business-credit-reports/">https://www.equifax.com/business/business-credit-reports/</a> (credit reporter); Experian, <a href="https://www.experian.com/small-business/business-credit-reports">https://www.experian.com/small-business/business-credit-reports</a> (credit
reporter).
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While these non-public sources of data on small businesses may
provide a useful supplement to existing Federal sources of small
business lending data, these private and nonprofit sources often do not
have lending information, may rely in places on unverified research
based on public internet sources, and/or narrowly limit use cases for
parties accessing data. Further, commercial datasets are generally not
free to public users and can be costly, raising equity issues for
stakeholders who cannot afford access.
C. The Landscape of Small Business Finance
Notwithstanding the lack of data on the market, it is clear that
financing plays an important role in enabling small businesses to grow
and contribute to the economy. When it is available, financing not only
provides resources for small businesses to smooth cash flows for
current operations, but also affords business owners the opportunity to
invest in business growth. An analysis by the National Small Business
Association, which examined data from 1993 through 2016, found a
correlation between small business owners' ability to access credit and
their ability to hire.\74\ This same study found that, while not the
sole cause, the inability to secure financing may have led 16 percent
of small businesses to reduce their number of employees and
approximately 10 percent of small businesses to reduce employee
benefits. Lack of access to financing also contributed to a further 10
percent of small businesses being unable to increase store inventory in
order to meet existing demand.\75\
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\74\ Nat'l Small Bus. Ass'n, 2016 Year-End Economic Report (July
2017), <a href="https://www.nsba.biz/wp-content/uploads/2017/02/Year-End-Economic-Report-2016.pdf">https://www.nsba.biz/wp-content/uploads/2017/02/Year-End-Economic-Report-2016.pdf</a>.
\75\ Id.
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To support their growth or to make it through harder times, small
businesses look to a variety of funding sources. Especially when
starting out, entrepreneurs often rely on their own
[[Page 56364]]
savings and help from family and friends. If a business generates a
profit, its owners may decide to reinvest retained earnings to fund
further growth. However, for many aspiring business owners--and their
personal networks--savings and retained earnings may not be sufficient
to fund a new venture or grow it, leading owners to seek other sources
of funding. This is particularly true for minority- and women-led
households, which on average have less wealth than their white- and
men-led counterparts.\76\
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\76\ Emily Moss et al., The Black-White Wealth Gap Left Black
Households More Vulnerable, Brookings Inst. (Dec. 8, 2020), <a href="https://www.brookings.edu/blog/up-front/2020/12/08/the-black-white-wealth-gap-left-black-households-more-vulnerable/">https://www.brookings.edu/blog/up-front/2020/12/08/the-black-white-wealth-gap-left-black-households-more-vulnerable/</a> (detailing wealth gaps in
2019 by race and sex that show white male households with more
wealth than white female or Black male or female households at all
age brackets). See also Erin Ruel & Robert Hauser, Explaining the
Gender Wealth Gap, 50 Demography 1155, 1165 (Dec. 2012), <a href="https://read.dukeupress.edu/demography/article/50/4/1155/169553/Explaining-the-Gender-Wealth-Gap">https://read.dukeupress.edu/demography/article/50/4/1155/169553/Explaining-the-Gender-Wealth-Gap</a> (finding a gender wealth gap of over $100,000
in a longitudinal study over 50 years of a single age cohort in
Wisconsin); Neil Bhutta et al., Bd. of Governors of the Fed. Reserve
Sys., Disparities in Wealth by Race and Ethnicity in the 2019 Survey
of Consumer Finances (Sept. 28, 2020), <a href="https://www.federalreserve.gov/econres/notes/feds-notes/disparities-in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-consumer-finances-20200928.htm">https://www.federalreserve.gov/econres/notes/feds-notes/disparities-in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-consumer-finances-20200928.htm</a> (finding median white family wealth in 2019 of
$188,200 compared with $24,100 for Black families and $36,100 for
Hispanic families).
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One such source of funding comes from others besides family and
friends, whether high net worth individuals or ``angel investors,''
venture capital funds, or, in a more recent development usually
facilitated by online platforms, via crowdsourcing from retail
investors. Often, these early investments take the form of equity
funding, which business owners are not obligated to repay to investors.
However, equity funding requires giving up some ownership and control
to investors, which certain entrepreneurs may not wish to do. For small
businesses, equity funding also tends to be somewhat more expensive
than debt financing in the longer run. This is for a number of reasons,
including that loan interest payments, unlike capital gains, are tax-
deductible.\77\ Finally, equity investments from others besides family
and friends are available to only a minority of small businesses.
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\77\ Jim Woodruff, The Advantages and Disadvantages of Debt and
Equity Financing, CHRON (updated Mar. 4, 2019), <a href="https://smallbusiness.chron.com/advantages-disadvantages-debt-equity-financing-55504.html">https://smallbusiness.chron.com/advantages-disadvantages-debt-equity-financing-55504.html</a>.
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Many small businesses instead seek debt financing from a wide range
of providers. These providers include depository institutions, such as
banks, savings associations, and credit unions,\78\ as well as fintechs
and commercial finance companies, specialized providers of specific
financing products, and a range of government and government-sponsored
enterprises, among others.
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\78\ For purposes of this notice of proposed rulemaking, the
Bureau is using the term depository institution to mean any bank or
savings association defined by section 3(c)(1) of the Federal
Deposit Insurance Act, 12 U.S.C. 1813(c)(1), or credit union defined
pursuant to the Federal Credit Union Act, as implemented by 12 CFR
700.2. The Bureau notes that the Dodd-Frank Act defines a depository
institution to mean any bank or savings association defined by the
Federal Deposit Insurance Act; there, that term does not encompass
credit unions. 12 U.S.C. 5301(18)(A), 1813(c)(1). The Bureau is
referring to banks and savings associations together with credit
unions as depository institutions throughout this notice, unless
otherwise specified, to facilitate analysis and discussion.
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In the past, small businesses principally sought credit from banks;
however, as banks have merged and consolidated, particularly in the
wake of the Great Recession, they have provided less financing to small
businesses.\79\ As noted earlier, the number of banks has declined
significantly since a post-Great Depression peak in 1986 of over 18,000
institutions to around 5,200 institutions today,\80\ while 13,500
branches closed from 2009 to mid-2020, representing a 14 percent
decrease.\81\ Although nearly half of counties either gained bank
branches or retained the same number between 2012 and 2017, the
majority lost branches over this period.\82\ Out of 44 counties that
were deeply affected by branch closures, defined as having 10 or fewer
branches in 2012 and seeing five or more of those close by 2017, 39
were rural counties.\83\ Of rural counties, just over 40 percent lost
bank branches in that period; the rural counties that experienced
substantial declines in bank branches tend to be lower-income and with
a higher proportion of African-American residents relative to other
rural counties,\84\ raising concerns about equal access to credit.
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\79\ Rebel A. Cole, Off. of Advocacy, Small Bus. Admin., How Did
Bank Lending to Small Business in the United States Fare After the
Financial Crisis?, at 26 (Jan. 2018), <a href="https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf">https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf</a> (showing a decline in bank loans to small
businesses from 2008 to 2015 from $710 billion to $600 billion). The
level of bank lending to small businesses has recovered somewhat
since a trough in 2012-13 that represented the lowest amount of
lending since 2005. Fed. Deposit Ins. Corp., <a href="https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx">https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx</a> (last visited July 22, 2021).
\80\ Congressional Research Serv., Small Business Credit Markets
and Selected Policy Issues, at 6 (Aug. 20, 2019), <a href="https://fas.org/sgp/crs/misc/R45878.pdf">https://fas.org/sgp/crs/misc/R45878.pdf</a>.
\81\ Bruce C. Mitchell et al., Nat'l Cmty. Reinvestment Coal.,
Relationships Matter: Small Business and Bank Branch Locations, at 6
(2020), <a href="https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/">https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/</a> (stating that in 2009 there were 95,596 brick
and mortar full-service branches or retail locations but, as of June
30, 2020, that number had fallen to 82,086).
\82\ Bd. of Governors of the Fed. Reserve Sys., Perspectives
from Main Street: Bank Branch Access in Rural Communities, at 1, 3-
4, 19 (Nov. 2019), <a href="https://www.federalreserve.gov/publications/files/bank-branch-access-in-rural-communities.pdf">https://www.federalreserve.gov/publications/files/bank-branch-access-in-rural-communities.pdf</a>.
\83\ Id.
\84\ Id.
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As banks and branches have merged and/or closed, the share of
banking assets has also become increasingly concentrated in the largest
institutions, with banks of over $10 billion in assets representing 84
percent of all industry assets in 2018,\85\ totaling $15.1 out of $17.9
trillion.\86\ Nevertheless, banks of under $10 billion in assets
continue to hold approximately half of all small business loans (using
the FFIEC Call Report definition of loans of under $1 million),
highlighting the importance of smaller banks to the small business
lending market.\87\ Since smaller bank credit approvals have
traditionally been close to 50 percent, while large banks approve only
25-30 percent of applications, bank consolidation may have implications
for small business credit access.\88\ Since institutions under $1.322
billion in assets are not required to report on lending under the
CRA,\89\ it is difficult to precisely assess the
[[Page 56365]]
impact of bank consolidation and shuttered branches on small business
lending and access to credit in local areas.\90\ By contrast, credit
unions increased their small business lending from $30 billion in 2008
to at least $55 billion in 2019.\91\ Like banks, credit unions
typically receive high satisfaction scores among small business
borrowers, reflecting more high-contact, relationship-based lending
models.\92\
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\85\ Congressional Research Serv., Small Business Credit Markets
and Selected Policy Issues, at 6 (Aug. 20, 2019), <a href="https://fas.org/sgp/crs/misc/R45878.pdf">https://fas.org/sgp/crs/misc/R45878.pdf</a>.
\86\ Fed. Deposit Ins. Corp., Bank Data and Statistics, <a href="https://www.fdic.gov/bank/statistical/">https://www.fdic.gov/bank/statistical/</a> (last visited Aug. 22, 2021).
\87\ Speech by Board Governor Lael Brainard: Community Banks,
Small Business Credit, and Online Lending (Sept. 30, 2015), <a href="https://www.federalreserve.gov/newsevents/speech/brainard20150930a.htm">https://www.federalreserve.gov/newsevents/speech/brainard20150930a.htm</a>.
Banks with under $10 billion in assets are often referred to as
``community banks.'' Congressional Research Serv., Over the Line:
Asset Thresholds in Bank Regulation, at 2-3 (May 3, 2021), <a href="https://fas.org/sgp/crs/misc/R46779.pdf">https://fas.org/sgp/crs/misc/R46779.pdf</a> (noting that the Board of Governors
of the Federal Reserve System (Board) and the Office of the
Comptroller of the Currency (OCC) define community banks as having
under $10 billion in assets, although there may be other criteria,
with the FDIC considering also geographic footprint and a relative
emphasis on making loans and taking deposits as opposed to engaging
in securities and derivatives trading). Community banks are also
more likely to engage in relationship-based lending. See id. at 3.
\88\ Biz2Credit, Biz2Credit Small Business Lending Index,
<a href="https://www.biz2credit.com/small-business-lending-index">https://www.biz2credit.com/small-business-lending-index</a> (last
visited July 22, 2021). These historical approval rates are
reflected in pre-pandemic Small Business Lending Index releases by
Biz2Credit. See, e.g., Biz2Credit, Small Business Loan Approval
Rates at Big Banks Remain at Record High in February 2020:
Biz2Credit Small Business Lending Index, <a href="https://www.biz2credit.com/small-business-lending-index/february-2020">https://www.biz2credit.com/small-business-lending-index/february-2020</a> (last visited July 29,
2021) (showing large bank approvals of 28.3 percent in February 2020
and of 27.2 percent in February 2019 and smaller bank approvals of
50.3 percent in February 2020 and of 48.6 percent in February 2019).
\89\ See part II.B above.
\90\ Bruce C. Mitchell et al., Nat'l Cmty. Reinvestment Coal.,
Relationships Matter: Small Business and Bank Branch Locations,
<a href="https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/">https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/</a> (last visited July 27, 2021).
\91\ Rebel A. Cole, Off. of Advocacy, Small Bus. Admin., How Did
Bank Lending to Small Business in the United States Fare After the
Financial Crisis?, at 26 (Jan. 2018), <a href="https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf">https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf</a>.
\92\ Fed. Reserve Banks, Small Business Credit Survey, 2021
Report On Employer Firms (2021), <a href="https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2021/2021-sbcs-employer-firms-report">https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2021/2021-sbcs-employer-firms-report</a>.
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Certain banks and credit unions choose to be mission-based lenders,
as CDFIs or Minority Depository Institutions (MDIs).\93\ Mission-based
lenders focus on providing credit to traditionally underserved and low-
income communities and individuals to promote community development and
expand economic opportunity, making them a relatively smaller by dollar
value but essential part of the small business lending market. There
were over 1,200 CDFIs (around half of which are depository
institutions) as of May 2021 and over 140 MDIs as of March 2021.\94\
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\93\ According to the FDIC, FDIC-insured MDIs and CDFI banks are
banks, savings banks, and savings associations (collectively, banks)
that serve minority, low- or moderate-income (LMI), and rural
communities at higher rates than mainstream banks. MDIs serve
minority communities including African American, Asian American,
Hispanic American, and Native American. CDFI banks are certified
through the U.S. Department of the Treasury by demonstrating they
serve LMI communities. See, e.g., Fed. Deposit Ins. Corp. Minority
Depository Institutions Program website, <a href="https://www.fdic.gov/regulations/resources/minority/mission-driven/index.html">https://www.fdic.gov/regulations/resources/minority/mission-driven/index.html</a> (last
visited July 11, 2021).
\94\ Cmty. Dev. Fin. Inst., CDFI Certification, <a href="https://www.cdfifund.gov/programs-training/certification/cdfi">https://www.cdfifund.gov/programs-training/certification/cdfi</a> (last visited
July 21, 2021); Fed. Deposit Ins. Corp., Minority Depository
Institutions Program (last updated June 9, 2021), <a href="https://www.fdic.gov/regulations/resources/minority/mdi.html">https://www.fdic.gov/regulations/resources/minority/mdi.html</a>.
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During a period in which that depository institutions have been
providing relatively less funding to small businesses,\95\ small
businesses have increasingly relied on other nondepository institutions
for financing. Since nondepositories typically do not report their
small business financing activities to regulators, however, there are
no authoritative sources for either the number of such entities or the
dollar value of financing they provide to small businesses.\96\
However, what data are available make clear that fintech firms are
rapidly increasing their share of the small business financing
market.\97\
---------------------------------------------------------------------------
\95\ See Rebel A. Cole, Off. of Advocacy, Small Bus. Admin., How
Did Bank Lending to Small Business in the United States Fare After
the Financial Crisis?, at 26 (Jan. 2018), <a href="https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf">https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf</a> (showing a decline in
bank loans to small businesses from 2008-15 from $710 billion to
$600 billion). The level of bank lending to small businesses has
recovered somewhat since a trough in 2012-13 that represented the
lowest amount of lending since 2005. See also Fed. Deposit Ins.
Corp., <a href="https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx">https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx</a> (last visited July 21,
2021) (tabulating outstanding balances for credit extended to small-
and non-small business lending by banks and thrifts over time).
\96\ See part II.B above.
\97\ See part II.D below.
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Whether depository or nondepository, each provider of small
business financing assesses a variety of different criteria to
determine whether and on what terms to grant an extension of credit or
other financing product, including business and financial performance,
the credit history of the business and its owner(s), the time in
business, and the industry, among other factors. Protections such as
guarantees, collateral, and insurance can mitigate perceived risks,
potentially enabling a lender to offer better terms or facilitating an
extension of credit that would otherwise not meet lending limit or
underwriting criteria. Often, government agencies, including the SBA,
FHA, and USDA, guarantee or insure loans themselves to encourage
lenders to provide credit to borrowers that may not otherwise be able
to obtain credit, either on affordable terms and conditions or at
all.\98\ Different lenders also employ diverse methods for assessing
risk, with smaller banks generally relying more on traditional
underwriting methods and typically managing multi-product
relationships. Fintechs increasingly use algorithms, automation, and
even AI and machine learning to assess risk and make underwriting
decisions, with originations typically being less relationship-based in
nature.
---------------------------------------------------------------------------
\98\ Congressional Research Serv., Small Business Administration
7(a) Loan Guaranty Program (updated June 21, 2021), <a href="https://fas.org/sgp/crs/misc/R41146.pdf">https://fas.org/sgp/crs/misc/R41146.pdf</a> (discussing the SBA's flagship 7(a) loan
guarantee program); U.S. Dep't of Hous. & Urban Dev., Descriptions
Of Multifamily Programs, <a href="https://www.hud.gov/program_offices/housing/mfh/progdesc">https://www.hud.gov/program_offices/housing/mfh/progdesc</a> (last visited July 27, 2021) (listing FHA
mortgage insurance programs for 5+ unit residential developments);
Farm Serv. Agency, U.S. Dep't of Agric., Guaranteed Loan Program
Fact Sheet (Mar. 2020), <a href="https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/guaranteed_loan_program-factsheet.pdf">https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/guaranteed_loan_program-factsheet.pdf</a>
(discussing the USDA's Farm Service Agency guaranteed loan program).
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As well as diversity in underwriting methodology and criteria,
there are also considerable differences across small business financing
products and providers with respect to pricing methods and repayment
structures. As a result, it can be challenging to compare the
competitiveness of product pricing and terms. The Bureau understands
that term loans, lines of credit, and credit cards typically disclose
annualized interest rates; leases often take into account depreciation;
factoring products discount an invoice's value and add a fee; and MCAs
apply a multiple to the value of the up-front payment.\99\ Moreover,
providers may add additional fees that are not standardized within
industries, much less across them. The Bureau believes that this
complexity may confuse business owners and render them unable to secure
more favorable rates due to opacity in offers presented--which in some
cases may even be deliberate \100\--and a corresponding inability to
effectively compare across different financing options.\101\ This may
impair applicants' ability to make informed choices.
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\99\ See part II.D below for definitions of the different
product categories.
\100\ Press Release, Fed. Trade Comm'n, Cash Advance Firm to Pay
$9.8M to Settle FTC Complaint It Overcharged Small Businesses (Apr.
22, 2021), <a href="https://www.ftc.gov/news-events/press-releases/2021/04/cash-advance-firm-pay-98m-settle-ftc-complaint-it-overcharged">https://www.ftc.gov/news-events/press-releases/2021/04/cash-advance-firm-pay-98m-settle-ftc-complaint-it-overcharged</a>
(settling a lawsuit between the Federal Trade Commission (FTC) and
an MCA provider for $9.8 million where the complaint alleged that
the provider ``deceived'' and ``misle[d]'' business borrowers about
the amount and terms of financing); Bd. of Governors of the Fed.
Reserve Sys., Record of Meeting: Community Advisory Council and the
Board of Governors, at 7 (Oct. 5, 2018), <a href="https://www.federalreserve.gov/aboutthefed/files/cac-20181005.pdf">https://www.federalreserve.gov/aboutthefed/files/cac-20181005.pdf</a> (noting a
growing trend of small business owners facing difficulty with
expensive loan products such as MCAs where the pricing and structure
of the loans is often deliberately obscured).
\101\ Fed. Trade Comm'n, `Strictly Business' Forum, Staff
Perspective, at 5 (Feb. 2020), <a href="https://www.ftc.gov/system/files/documents/reports/staff-perspective-paper-ftcs-strictly-business-forum/strictly_business_forum_staff_perspective.pdf">https://www.ftc.gov/system/files/documents/reports/staff-perspective-paper-ftcs-strictly-business-forum/strictly_business_forum_staff_perspective.pdf</a> (discussing the
difficulty in comparing across financing products with widely
differing methods for calculating and describing key features).
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D. Estimating the Size and Scope of the Small Business Financing Market
In light of the lack of data and the heterogeneity of products and
providers within the small business financing market, it can be
difficult to get a clear sense of the size and scope of the market. In
this section, the Bureau describes its estimates of the total
outstanding balances of credit in the market, the number of
institutions that are active in the small business
[[Page 56366]]
financing market, and how the Bureau arrived at these estimates. Where
possible, the Bureau tries to estimate the state of the small business
financing market at the end of 2019 in order to estimate the state of
the market during a year unaffected by the COVID-19 pandemic.
One challenge is that some of the data report the dollar value of
originations and some report outstanding balances. For the purposes of
this exercise and for most, but not all, products, the Bureau assumes
that for every $1 originated in the market in a given year, there is
approximately a corresponding $3 of outstanding balances. This
assumption is based on the ratio of the 2019 FFIEC Call Report data,
which totaled $721 billion in outstanding balances on bank loans to
small businesses and small farms, and the 2019 CRA data, which recorded
$264 billion in bank loan originations to small businesses and small
farms.\102\ This assumption is limited by the extent to which other
small business financing products differ from loans and lines of
credit, which make up the majority of financing products captured by
the FFIEC Call Report data and the CRA data.\103\
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\102\ FFIEC Call Report data records outstanding balances on
loans with origination amounts less than $1 million across
Commercial & Industrial, Nonfarm Nonresidential, Agricultural, and
Secured by Farmland lending categories. See FDIC Quarterly Banking
Profile Time Series, <a href="https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx">https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx</a> (last
visited August 29, 2021).
\103\ FFIEC Call Report data and CRA data on small business
credit products also include business credit card products, but
loans and lines of credit made up $713 billion out of $775 billion
in outstanding balances on bank, savings association, and credit
union loans to small businesses in 2019. One important caveat to
this assumption is that products with materially shorter average
term lengths, for example credit cards, factoring products, and
MCAs, may have an inverse ratio of originations to outstanding
balances. For example, top issuers of general purpose credit cards
recorded purchase volumes of two to seven times their outstanding
balances in 2020. Nilson Report, Issue 1192, at 6 (Feb. 2021),
<a href="https://nilsonreport.com/publication_newsletter_archive_issue.php?issue=1192">https://nilsonreport.com/publication_newsletter_archive_issue.php?issue=1192</a>. If business-
purpose credit cards, factoring products, and MCAs behaved similarly
with respect to the ratio of originations to outstanding balances,
then for every $1 originated in the market in a given year, there
could be a corresponding $0.14-0.50 in outstanding balances for such
products ($1 divided by two to seven).
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As detailed in this section, the Bureau estimates that the market
for small business financing products totaled $1.4 trillion in
outstanding balances in 2019. The Bureau estimates that small business
financing by depository institutions makes up just over half of small
business financing by private institutions. In 2020 and 2021, COVID-19
emergency lending programs added a further $1 trillion to this value,
bringing the overall size of the small business financing market up to
$2.4 trillion. Below, the Bureau estimates the market share for
different small business financing products.
Since the available data regarding depository institutions' small
loans to businesses address term loans, lines of credit, and credit
cards together, the respective share of different products in the
overall small business financing market is difficult to assess. As
detailed in this section, the Bureau estimates that together, private
term loans and lines of credit constitute the largest small business
credit product by value, totaling approximately $770 billion in
outstanding balances in 2019, although PPP and EIDL Program loans have
since added $1 trillion to this figure.
Lending by banks, saving associations, and credit unions comprises
the largest part of this total amount for private term loans and lines
of credit. Using FFIEC Call Report data for December 2019, the Bureau
estimates that banks and savings associations account for a total of
about $721 billion in outstanding credit to small businesses and small
farms as of December 2019.\104\ Using NCUA Call Report data for
December 2019, the Bureau estimates that credit unions account for a
total of about $55 billion in outstanding credit to members for
commercial purposes.\105\ From this value, the Bureau subtracts $62
billion in credit card lending to arrive at $713 billion in outstanding
balances for term loans and lines of credit. From this value, the
Bureau further subtracts $134 billion in SBA guaranteed loans to arrive
at $580 billion in outstanding balances for private term loans and
lines of credit extended by depository institutions (i.e., banks,
savings associations, and credit unions) as of December 2019.
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\104\ Calculated from FFIEC Call Report data accessed on June 8,
2021. The Bureau notes that, as discussed in part II.B above, these
estimates rely on small loans to businesses as a proxy for loans to
small businesses. As such, the Bureau acknowledges that the true
outstanding value of credit extended to small businesses by such
institutions may be different than what is presented here. For
example, the small loans to businesses proxy would overestimate the
value of outstanding credit if a significant number of small loans
to businesses and farms are to businesses or farms that are actually
large. Alternatively, the proxy would underestimate the value of
outstanding credit to small businesses if a significant number of
businesses and farms that are small under the proposed rule take out
loans that are larger than $1 million or $500,000, for businesses
and farms, respectively.
\105\ Nat'l Credit Union Admin., 2019 Call Report Quarterly
Data, <a href="https://www.ncua.gov/analysis/credit-union-corporate-call-report-data/quarterly-data">https://www.ncua.gov/analysis/credit-union-corporate-call-report-data/quarterly-data</a> (last visited Aug. 24, 2021) (2019 NCUA
Call Report). The Bureau notes that, as discussed in part II.B
above, credit unions only report credit transactions made to members
for commercial purposes with values over $50,000. The Bureau uses
this value as a proxy for small business credit. The Bureau
acknowledges that the true value of small business credit extended
by credit unions may be different than what is presented here. For
example, this proxy may overestimate the value of outstanding small
business credit because some members are taking out loans for large
businesses. Alternatively, this proxy may underestimate the value of
outstanding small business credit if credit unions originate a
substantial number of small business loans with origination values
of under $50,000. For this analysis, the Bureau includes all types
of commercial loans to members except construction and development
loans and multifamily residential property. This includes loans
secured by farmland; loans secured by owner-occupied, non-farm, non-
residential property; loans secured by non-owner occupied, non-farm,
non-residential property; loans to finance agricultural production
and other loans to farmers; commercial and industrial loans;
unsecured commercial loans; and unsecured revolving lines of credit
for commercial purposes. The Bureau does include multifamily in part
VII below.
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The remaining $190 billion in outstanding balances for private term
loans and lines of credit was extended by various nondepository
institutions, namely commercial finance companies, fintechs, and
nondepository CDFIs.\106\
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\106\ There may additionally be lending by equipment and vehicle
dealers originating loans in their own name that is not captured
here.
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Commercial finance companies specialize in financing equipment and
vehicle purchases. The Bureau estimates that the value of outstanding
balances on credit extended by commercial finance companies totaled
approximately $160 billion. Using data from the Federal Reserve Board's
Finance Company Business Receivables data on owned assets as of
December 2019, the Bureau estimates commercial finance companies
outstanding credit for commercial purposes as the value of retail motor
vehicle loans plus equipment loans and other business receivables,
which totaled about $215 billion.\107\ The Bureau further assumes that
about 75 percent of this value, or $162 billion, can be attributed to
loans to small businesses.\108\
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\107\ Bd. of Governors of the Fed. Reserve Sys., Finance
Companies--G.20 (updated July 15, 2021), <a href="https://www.federalreserve.gov/releases/g20/hist/fc_hist_b_levels.html">https://www.federalreserve.gov/releases/g20/hist/fc_hist_b_levels.html</a>. The
Bureau does not include leases, since they are already counted
within the product category of equipment and vehicle leasing, or
wholesale loans, which it assumes are typically made to non-small
businesses.
\108\ This methodology is consistent with the approach taken by
Gopal and Schnabl (2020).
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Typical fintech providers are characterized primarily by providing
banking services exclusively in an online environment.\109\ The Bureau
estimates that total outstanding loan balances for fintech providers
reached around $25 billion in 2019. In a 2018 report, S&P Global
projected that online
[[Page 56367]]
platform lenders would originate about $9.3 billion in credit to small
and medium enterprises in 2019.\110\ Using this estimate, the Bureau
scales up the value of originations to $25 billion in estimated
outstanding balances, under the assumptions discussed above.\111\ At
the beginning of the COVID-19 pandemic and financial crisis, fintechs
originated around $22 billion in PPP loans to small businesses from
March to August 2020 \112\ and likely continued to originate billions
more during the third wave of PPP loans in 2021, which represents an
almost 90 percent increase or more in outstanding balances since
2019.\113\ This follows already rapid growth from $1.4 billion in
estimated outstanding balances in 2013.\114\
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\109\ Barkley & Schweitzer, 17 Int'l J. Cent. Banking at 35-36.
\110\ 2018 US Fintech Market Report at 6.
\111\ The Bureau notes that this figure may underestimate the
total value of fintech lending because it focuses on platform
lenders and may overestimate the value of lending to small
businesses because it also includes credit to medium businesses.
Additionally, the Bureau notes that fintechs often offer products
besides loans and lines of credit, and that there is no clear
demarcation between fintech, commercial finance company, and MCA
provider, limiting the precision of market size estimates. Finally,
fintechs often sell loans once originated to other entities,
securitize their originations, or purchase loans that banks have
originated, which may further present challenges to the precision of
market size estimates for this market segment.
\112\ Jessica Battisto et al., Who Benefited from PPP Loans by
Fintech Lenders?, Liberty Street Economics (May 27, 2021), <a href="https://libertystreeteconomics.newyorkfed.org/2021/05/who-received-ppp-loans-by-fintech-lenders.html">https://libertystreeteconomics.newyorkfed.org/2021/05/who-received-ppp-loans-by-fintech-lenders.html</a>; Small Bus. Admin., Paycheck
Protection Program (PPP) Report (approvals through 12 p.m. EST Apr.
16, 2020), <a href="https://www.sba.gov/sites/default/files/2020-06/PPP%20Deck%20copy-508.pdf">https://www.sba.gov/sites/default/files/2020-06/PPP%20Deck%20copy-508.pdf</a>; Small Bus. Admin., Paycheck Protection
Program (PPP) Report (approvals through Aug. 8, 2020), <a href="https://www.sba.gov/sites/default/files/2020-08/PPP_Report%20-%202020-08-10-508.pdf">https://www.sba.gov/sites/default/files/2020-08/PPP_Report%20-%202020-08-10-508.pdf</a>.
\113\ Per the program's intent, many PPP loans have been
forgiven since the program began, which may mean that outstanding
balances on PPP loans extended by fintech providers have since
declined.
\114\ Barkley & Schweitzer, 17 Int'l J. Cent. Banking at 35-36
(citing 2018 US Fintech Market Report at 5). This figure annualizes
$121 million in estimated 2013 quarterly originations to $484
million in annual originations and scales up to estimated
outstanding balances using the ratio between the FFIEC Call Report
and the CRA data discussed above.
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The Bureau estimates the value of outstanding balances on credit
extended by nondepository CDFIs to small business borrowers to be
around $1.5 billion. Using reporting by the CDFI Fund for 2019, the
Bureau scales down the outstanding balances for loan funds of $13.8
billion and for venture capital funds of $0.3 billion by the proportion
of all CDFI lending attributable to business borrowers, which totaled
$15.4 billion out of $141.2 billion.\115\
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\115\ CDFI Fund, CDFI Annual Certification and Data Collection
Report (ACR): A Snapshot for Fiscal Year 2019, at 17, 22 (Oct.
2020), <a href="https://www.cdfifund.gov/sites/cdfi/files/2021-01/ACR-Public-Report-Final-10292020-508Compliant.pdf">https://www.cdfifund.gov/sites/cdfi/files/2021-01/ACR-Public-Report-Final-10292020-508Compliant.pdf</a>. To the extent that CDFI loan
funds and venture capital funds extend credit to business customers
at different rates than CDFI banks and credit unions, this
calculation may over- or underestimate the value of lending to small
businesses by nondepository CDFIs. This figure also assumes that all
CDFI lending is for small businesses.
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Categorized here separately so as to distinguish residential from
non-residential loans, the Bureau estimates outstanding balances for
loans on 5+ unit residential dwellings to total over $30 billion.\116\
Using data from the Mortgage Bankers Association, the Bureau scales up
$11 billion in 2019 annual originations on loans of under $1 million in
value at origination for 5+ unit residential dwellings to $30 billion
in estimated outstanding balances, using the ratio between the FFIEC
Call Report and the CRA data discussed above.\117\
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\116\ Depository institutions, discussed above, extend a
sizeable proportion of loans for 5+ unit residential dwellings; both
nondepository and depository institutions are included in the total
for 5+ unit outstanding balances.
\117\ See Mortg. Bankers Ass'n, Annual Report on Multi-Family
Lending--2019, at 5 (2020), <a href="https://www.mba.org/store/products/research/general/report/2019-annual-report-on-multifamily-lending">https://www.mba.org/store/products/research/general/report/2019-annual-report-on-multifamily-lending</a>.
This includes both private loans, estimated at around $18 billion,
and loans extended by Fannie Mae, Freddie Mac, and the FHA,
estimated at around $13 billion. The share of 5+ unit residential
dwelling loans of all sizes extended by governmental or government-
sponsored entities was 41 percent. The Bureau assumes for the
purposes of this exercise that the same share is reflected in loans
of under $1 million in value at origination, although arguably this
share would be higher if government and government-sponsored
entities are extended disproportionately smaller dollar value loans
on average.
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Also categorized separately from depository institution totals so
as to distinguish private from government and government-sponsored
loans, the Bureau estimates that outstanding balances for loans
extended by the Small Business Administration and the Farm Credit
System totaled around $200 billion in 2019.\118\
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\118\ The grand total for lending by government and government-
sponsored entities would be approximately $210 billion, including 5+
unit residential dwelling loans extended by Fannie Mae, Freddie Mac,
and the FHA, which are separately recorded within the 5+ unit
residential dwelling loan product category.
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The SBA, through its traditional 7(a), 504, and microloan programs
as well as the Economic Impact Disaster Loan (EIDL) program and funding
for Small Business Investment Companies (SBICs), is the largest
governmental lender by value, with $143.5 billion in outstanding
balances at the end of fiscal 2019.\119\ However, since the outbreak of
the COVID-19 pandemic, SBA lending has increased in size by over $1
trillion due to the PPP, which totaled $800 billion, and the EIDL
Program, which totaled $210 billion.\120\
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\119\ Small Bus. Admin., Small Business Administration Loan
Program Performance (effective Mar. 31, 2021), <a href="https://www.sba.gov/document/report-small-business-administration-loan-program-performance">https://www.sba.gov/document/report-small-business-administration-loan-program-performance</a>. SBA guaranteed loans comprised $134 billion out of this
total, which amount has been deducted from the totals for depository
institutions to avoid double counting.
\120\ Small Bus. Admin., Paycheck Protection Program (PPP)
Report (approvals through May 31, 2021), <a href="https://www.sba.gov/sites/default/files/2021-06/PPP_Report_Public_210531-508.pdf">https://www.sba.gov/sites/default/files/2021-06/PPP_Report_Public_210531-508.pdf</a>; Small Bus.
Admin., Disaster Assistance Update--Nationwide COVID EIDL, Targeted
EIDL Advances, Supplemental Targeted Advances (June 3, 2021),
<a href="https://www.sba.gov/sites/default/files/2021-06/COVID-19%20EIDL%20TA%20STA_6.3.2021_Public-508.pdf">https://www.sba.gov/sites/default/files/2021-06/COVID-19%20EIDL%20TA%20STA_6.3.2021_Public-508.pdf</a>; Small Bus. Admin.,
Disaster Assistance Update--Nationwide EIDL Loans (Nov. 23, 2020),
<a href="https://www.sba.gov/sites/default/files/2021-02/EIDL%20COVID-19%20Loan%2011.23.20-508_0.pdf">https://www.sba.gov/sites/default/files/2021-02/EIDL%20COVID-19%20Loan%2011.23.20-508_0.pdf</a>.
---------------------------------------------------------------------------
The Farm Credit System is another important government-related part
of the small business credit landscape. The Bureau estimates that Farm
Credit System members had around $55 billion in outstanding balances of
credit extended to small farms in 2019. Using the same small loan to
farms proxy as is used in the FFIEC Call Report, the Bureau estimates
credit to farms with an origination value of less than $500,000. Based
on the Farm Credit System's 2019 Annual Information Statement of the
Farm Credit System, the Bureau estimates that outstanding balances of
such small credit to farms totaled $55 billion at the end of 2019.\121\
The Bureau notes that, as with the FFIEC Call Report proxy, this number
may include credit to non-small farms and may exclude larger credit
transactions extended to small farms.
---------------------------------------------------------------------------
\121\ Fed. Farm Credit Banks Funding Corp., Farm Credit 2019
Annual Information Statement of the Farm Credit System, at 54,
<a href="https://www.farmcreditfunding.com/ffcb_live/investorResources/informationStatements.html">https://www.farmcreditfunding.com/ffcb_live/investorResources/informationStatements.html</a> (last visited Aug. 13, 2021).
---------------------------------------------------------------------------
Mostly extended by depository institutions, the Bureau estimates
that the market for small business credit cards totaled over $60
billion in outstanding balances for 2020.\122\ Using data from Y-14
Form submissions to the Federal Reserve Board, the Bureau estimates the
value of outstanding balances for small business credit card accounts
where the loan is underwritten
[[Page 56368]]
with the sole proprietor or primary business owner as an
applicant.\123\
---------------------------------------------------------------------------
\122\ See Bd. of Governors of the Fed. Reserve Sys., Report
Forms FR Y-14M, <a href="https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDYnbIw+U9pka3sMtCMopzoV">https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDYnbIw+U9pka3sMtCMopzoV</a> (last visited
July 12, 2021). The Board's data are received from bank holding
companies over $50 billion in assets, which represent 70 percent of
outstanding balances for consumer credit cards; the corresponding
percent of balances captured for small business cards is not known,
so the total small business-purpose credit card market could be
substantially higher or lower. See Bureau of Consumer Fin. Prot.,
The Consumer Credit Card Market, at 18 (Aug. 2019), <a href="https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2019.pdf">https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2019.pdf</a>.
\123\ Off. of Mgmt. & Budget, Instructions for the Capital
Assessments and Stress Testing Information Collection (Reporting
Form FR-Y14M), OMB No. 7100-0341, at 148 (Mar. 2020), <a href="https://omb.report/icr/202101-7100-006/doc/108187801">https://omb.report/icr/202101-7100-006/doc/108187801</a>.
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Equipment and vehicle leasing, whereby businesses secure the right
to possess and use a piece of equipment or vehicle for a term in return
for consideration, is another important product category that is
estimated to value roughly $160 billion in outstanding balances in
2019. Using data from the Equipment Leasing and Financing Foundation
for 2019, the Bureau estimates the total size of the equipment and
vehicle leasing market for all sized businesses in 2019 to be
approximately $900 billion.\124\ The Bureau further assumes that small
businesses comprise around 18 percent of the total equipment and
vehicle leasing market.\125\
---------------------------------------------------------------------------
\124\ See Equip. Leasing & Fin. Found., Horizon Report, <a href="https://www.leasefoundation.org/industry-resources/horizon-report/">https://www.leasefoundation.org/industry-resources/horizon-report/</a> (last
updated Apr. 22, 2021).
\125\ See Karen Mills, Harvard Bus. Sch., State of Small
Business Lending, at 29 (July 2014), <a href="https://www.hbs.edu/ris/Supplemental%20Files/15-004%20HBS%20Working%20Paper%20Chart%20Deck_47695.pdf">https://www.hbs.edu/ris/Supplemental%20Files/15-004%20HBS%20Working%20Paper%20Chart%20Deck_47695.pdf</a> (estimating
equipment leasing outstanding balances for small business borrowers
at approximately $160 billion at Dec. 31, 2013); Monitor Daily, SEFI
Report Finds Strong Performance Despite Challenges, <a href="https://www.monitordaily.com/news-posts/sefi-report-finds-strong-performance-despite-challenges/">https://www.monitordaily.com/news-posts/sefi-report-finds-strong-performance-despite-challenges/</a> (last visited July 27, 2021) ($903
billion market in 2014, commensurate with an 18 percent market share
for small business borrowers at the time of the Karen Mills report).
---------------------------------------------------------------------------
Factoring is a similarly significant product type, estimated at
around $100 billion in market size for 2019.\126\ In a factoring
transaction, factors purchase, at a discount, a legally enforceable
claim for payment (i.e., accounts receivables or invoices) for goods
already supplied or services already rendered by a business for which
payment has not yet been made; hence, a factor's risk related to
repayment often lies with the business's customer and not the business
itself. In most cases, specific companies, called factors, provide
factoring products.
---------------------------------------------------------------------------
\126\ See Secured Fin. Found., 2019 Secured Finance: Market
Sizing & Impact Study Extract Report, at 7 (June 2019), <a href="https://www.sfnet.com/docs/default-source/data-files-and-research-documents/sfnet_market_sizing___impact_study_extract_f.pdf?sfvrsn=72eb7333_2">https://www.sfnet.com/docs/default-source/data-files-and-research-documents/sfnet_market_sizing___impact_study_extract_f.pdf?sfvrsn=72eb7333_2</a>.
This study estimated the total volume of the U.S. factoring market
to be $101 billion. To the extent that factoring volumes differ from
outstanding balances, the value of outstanding balances may be
higher or lower than this estimate. Also, this estimate captures
factoring for business borrowers of all sizes, not just small
business borrowers. The Bureau assumes that most factoring is
provided to small business customers.
---------------------------------------------------------------------------
The market for MCAs is developing rapidly and data are even more
scarce than for other segments of the small business lending market.
This limits the reliability of estimates as to the MCA market's size.
Based on market research conducted by Bryant Park Capital (BPC) and
reported on by <a href="http://deBanked.com">deBanked.com</a>, the Bureau estimates the 2019 market size
to be around $20 billion.\127\ The MCA market is also of particular
significance for smaller and traditionally underserved businesses that
may not qualify for other types of credit.\128\ MCAs are typically
structured to provide a lump sum payment up front (a cash advance) in
exchange for a share of future revenue until the advance, plus an
additional amount, is repaid. Unlike the majority of other small
business financing products, MCAs typically purport to be for short
durations.\129\ The Bureau understands that MCAs also tend to be
relatively high-cost products.\130\ Two States, New York and
California, will soon implement laws that will require providers of
``sales-based financing,'' such as MCAs, to provide disclosures
(including estimated APR) similar to those required under the Truth in
Lending Act (TILA),\131\ which generally only applies to consumer
credit.\132\
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\127\ Paul Sweeney, Gold Rush: Merchant Cash Advances are Still
Hot, deBanked (Aug. 18, 2019), <a href="https://debanked.com/2019/08/gold-rush-merchant-cash-advances-are-still-hot/">https://debanked.com/2019/08/gold-rush-merchant-cash-advances-are-still-hot/</a>. BPC estimates appear to
reference origination volumes rather than outstanding balances. See
Nimayi Dixit, S&P Global Market Intelligence, Payment Fintechs Leave
Their Mark On Small Business Lending (Aug. 28, 2018), <a href="https://www.spglobal.com/marketintelligence/en/news-insights/research/payment-fintechs-leave-their-mark-on-small-business-lending">https://www.spglobal.com/marketintelligence/en/news-insights/research/payment-fintechs-leave-their-mark-on-small-business-lending</a>.
Depending on credit multiplier effects, the value of annual
origination volumes could be smaller or greater than outstanding
balances. Without information on outstanding balances and for the
purposes of calculating a market size for small business financing
in 2019, the Bureau assumes in this paper a 1:1 ratio between annual
origination volumes and outstanding balances for MCA products. See
above for discussion of credit multiplier effects.
\128\ Cf. Barbara Lipman & Ann Marie Wiersch, Bd. of Governors
of the Fed. Reserve Sys., Uncertain Terms: What Small Business
Borrowers Find When Browsing Online Lender websites, at 3 (Dec.
2019), <a href="https://www.federalreserve.gov/publications/files/what-small-business-borrowers-find-when-browsing-online-lender-websites.pdf">https://www.federalreserve.gov/publications/files/what-small-business-borrowers-find-when-browsing-online-lender-websites.pdf</a>
(observing that online lenders, including providers of MCA products,
position themselves as offering financing to borrowers underserved
by traditional lenders).
\129\ See id. (stating that MCAs are generally repaid in three
to 18 months).
\130\ Id. (stating that annual percentage rates on MCA products
can exceed 80 percent or rise to triple digits). See also Fed. Trade
Comm'n, `Strictly Business' Forum, Staff Perspective, at 5 (Feb.
2020), <a href="https://www.ftc.gov/system/files/documents/report/staff-perspective-paper-ftcs-strictly-business-forum/strickly_business__forum_staff_perspective.pdf">https://www.ftc.gov/system/files/documents/report/staff-perspective-paper-ftcs-strictly-business-forum/strickly_business__forum_staff_perspective.pdf</a> (observing
stakeholder concern about the high-cost of MCAs that can reach
triple digit annual percentage rates).
\131\ 15 U.S.C. 1601 et seq.
\132\ New York State law will require, as of January 1, 2022,
that providers of ``sales-based financing'' provide disclosures to
borrowers which would include calculations of an estimated annual
percentage rate in accordance with the Bureau's Regulation Z, 12 CFR
part 1026. See New York S.898, section 803(c) (signed Jan. 6, 2021)
(amending S.5470-B), <a href="https://legislation.nysenate.gov/pdf/bills/2021/s898">https://legislation.nysenate.gov/pdf/bills/2021/s898</a>. Similarly, California's Department of Financial
Protection and Innovation is in the process of issuing a rule to
implement a California law requiring disclosures by commercial
financing companies, including those providing sales-based
financing. See 10 Cal. Code Reg. 2057(a)(22) (defining sales-based
financing as ``a commercial financing transaction that is repaid by
a recipient to the financer as a percentage of sales or income, in
which the payment amount increases and decreases according to the
volume of sales made or income received by the recipient'' and
including ``a true[hyphen]up mechanism''); 10 Cal. Code Reg.
2065(a)(3) and 3001 (requiring sales-based financing providers
disclosure estimated annual percentage rate according to Regulation
Z, 12 CFR part 1026). Under these laws, providers of commercial
financing generally will be required to disclose: (1) The total
amount financed, and the amount disbursed if it is different from
the total amount financed; (2) the finance charge; (3) the APR (or
the estimated APR for sales-based financing and factoring
transactions), calculated in accordance with TILA and Regulation Z;
(4) the total repayment amount; (5) the term (or the estimated term
for sales-based financing) of the financing; (6) periodic payment
amounts; (7) prepayment charges; (8) all other fees and charges not
otherwise disclosed; and (9) any collateral requirements or security
interests. See Cal. S.B. 1235 (Sept. 30, 2018), <a href="https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235">https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235</a>; N.Y. S.B. S5470B (July
23, 2020), <a href="https://legislation.nysenate.gov/pdf/bills/2019/S5470B">https://legislation.nysenate.gov/pdf/bills/2019/S5470B</a>.
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Finally, trade credit is another significant market, which the
Bureau estimates to total $51 billion in outstanding balances in 2019.
Using a report by Fundbox/PYMNTS, the Bureau estimates the trade credit
market size by adding the total accounts payable for businesses under
$1 million in annual revenue.\133\ Considering the total value of
accounts payable for businesses between $1 million and $5 million would
increase the market size by $88 billion.\134\ Trade credit is an often
informal, business-to-business transaction, usually between non-
financial firms whereby suppliers allow their customers to acquire
goods and/or
[[Page 56369]]
services without requiring immediate payment.
---------------------------------------------------------------------------
\133\ See Fundbox/<a href="http://PYMNTS.com">PYMNTS.com</a>, The Trade Credit Dilemma, at 11
(May 2019), <a href="https://www.pymnts.com/wp-content/uploads/2019/05/Trade-Credit-Dilemma-Report.pdf">https://www.pymnts.com/wp-content/uploads/2019/05/Trade-Credit-Dilemma-Report.pdf</a> (estimating accounts payable for
businesses with revenue of under $250,000 at $6.7 billion and for
businesses with revenue of $250,000 to $999,000 at $44.6 billion).
\134\ Id. The trade credit market is estimated to total $1.6
trillion across all business sizes in the United States. In the
overall $1.4 trillion market size total for all small business
financing products, the Bureau has included only the trade credit
market for businesses of up to $1 million in revenue for consistency
with its White Paper.
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The Bureau estimates that there were approximately 8,100 financial
institutions extending small business financing in 2019, almost 80
percent of which were depository institutions.
Based on FFIEC Call Report data for December 2019, the Bureau
estimates that about 5,100 banks and savings associations are active in
the small business lending market, out of a total of about 5,200 banks
and savings associations.\135\ The Bureau assumes that a bank or
savings association is ``active'' in the market if it reports a
positive outstanding balance of small loans, lines of credit, and
credit cards to businesses.
---------------------------------------------------------------------------
\135\ Calculated from FFIEC Call Report data accessed on June 8,
2021.
---------------------------------------------------------------------------
Based on the NCUA Call Report data for December 2019, the Bureau
estimates that about 1,200 out of 5,300 total credit unions were active
in the small business lending market.\136\ The Bureau defines a credit
union as ``active'' in the market if it reported a positive number of
originations of loans, lines of credit, and credit cards to members for
commercial purposes in 2019.
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\136\ 2019 NCUA Call Report. (One hundred twelve credit unions
were not federally insured as of December 2019 but are included here
as depository institutions. Calculated from NCUA Call Report data
accessed on June 8, 2021.)
---------------------------------------------------------------------------
The Bureau estimates that there are about 1,800 nondepository
institutions active in the small business financing market,\137\
accounting for around $550 billion in outstanding credit to small
businesses.
---------------------------------------------------------------------------
\137\ There may also be cooperative or nonprofit lenders as well
as equipment and vehicle finance dealers originating in their own
name that are not captured by the Bureau in these figures. For
example, by searching Uniform Commercial Code (UCC) filings, Manasa
Gopal and Philipp Schnabl identified 19 cooperative lenders that
originated at least 1,500 loans over the period from 2006 to 2016.
Manasa Gopal & Philipp Schnabl, The Rise of Finance Companies and
FinTech Lenders in Small Business Lending, N.Y.U. Stern Sch. of
Bus., at 18 (May 13, 2020), <a href="https://ssrn.com/abstract=3600068">https://ssrn.com/abstract=3600068</a>.
Additionally, these figures do not include trade creditors, which
are non-financial companies that extend credit by allowing customers
a period of time in which to pay and which are much greater in
number since the practice is widespread across the economy.
---------------------------------------------------------------------------
The Bureau estimates that about 300 commercial finance companies
are engaged in small business lending. By searching UCC filings, Manasa
Gopal and Philipp Schnabl identified almost 300 commercial finance
companies, including both independent and captive finance companies,
with at least 1,500 small business loans between 2006 and 2016.\138\
The Bureau also estimates there to be about 30 or more fintechs
currently active in the small business lending market, not including
MCA providers. Using the same methodology as for commercial finance
companies, Gopal and Schnabl identified 19 fintech companies.\139\ The
Bureau conservatively increases this estimate to 30 to account for
rapid growth in the industry from 2016 to 2019.
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\138\ Id. This figure combines 192 independent finance companies
with 95 captive finance companies. Since this estimate captures only
those commercial finance companies averaging at least 150 loans per
year over the 2006 to 2016 period, it may exclude smaller volume
lenders and should be considered conservative.
\139\ Id. Since this estimate captures only those fintechs
averaging at least 150 loans per year over the 2006 to 2016 period,
it may exclude smaller volume lenders and should be considered
conservative. On the other hand, since 2019, the COVID-19 economic
shock may have led to some fintechs scaling back or exiting the
small business financing market. See, e.g., Ingrid Lunden, Amex
Acquires SoftBank-backed Kabbage After Tough 2020 for the SMB
Lender, TechCrunch (Aug. 17, 2020), <a href="https://techcrunch.com/2020/08/17/amex-acquires-softbank-backed-kabbage-after-tough-2020-for-the-smb-lender/">https://techcrunch.com/2020/08/17/amex-acquires-softbank-backed-kabbage-after-tough-2020-for-the-smb-lender/</a> (noting that Kabbage temporarily shut down credit lines
to small businesses during April 2020 and then spun off its small
business loan portfolio when it was subsequently acquired by
American Express).
---------------------------------------------------------------------------
The Bureau estimates that 340 nondepository CDFIs are engaged in
small business lending. Both depository and nondepository institutions
can be CDFIs. Depository CDFIs are counted in the numbers of banks,
savings associations, and credit unions engaged in small business
lending. According to the CDFI fund, 487 nondepository funds (i.e.,
loan funds and venture capital funds) reported as CDFIs in 2019.\140\
Of these, 340 institutions reported that business finance or commercial
real estate finance were a primary or secondary line of business in
2019.\141\
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\140\ CDFI Fund, CDFI Annual Certification and Data Collection
Report (ACR): A Snapshot for Fiscal Year 2019, at 8 (Oct. 2020),
<a href="https://www.cdfifund.gov/sites/cdfi/files/2021-01/ACR-Public-Report-Final-10292020-508Compliant.pdf">https://www.cdfifund.gov/sites/cdfi/files/2021-01/ACR-Public-Report-Final-10292020-508Compliant.pdf</a>.
\141\ Id. at 15-16.
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The Bureau estimates that about 270 nondepository mortgage lenders
participated in the credit market for 5+ unit residential dwellings in
2019 and that about 50 of these institutions extended 25 or more of
these loans to small businesses. In its ``2019 Multifamily Lending
Report,'' the Mortgage Bankers Association lists annual multifamily
lending volumes by institution, including a distinction for loans of
under $1 million in value at origination.\142\ Using the same small
loan to business proxy as is used in the FFIEC Call Report, the Bureau
estimates the number of nondepository mortgage lenders by counting the
number of institutions that appear on this list that are not depository
institutions and that extended at least 50 loans in 2019. The Bureau
counts institutions extending at least 50 loans of any size in order to
estimate institutions extending at least 25 small loans, based on the
assumption that some 50 percent of these loans may have been for values
greater than $1 million.
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\142\ See Mortg. Bankers Ass'n, Annual Report on Multi-Family
Lending--2019, at 9-66 (2020), <a href="https://www.mba.org/store/products/research/general/report/2019-annual-report-on-multifamily-lending">https://www.mba.org/store/products/research/general/report/2019-annual-report-on-multifamily-lending</a>.
_____________________________________-
Based on data from UCC filings collected by <a href="http://deBanked.com">deBanked.com</a>, the
Bureau estimates that about 100 institutions were active in the market
for providing MCA products to small businesses in 2021.\143\
---------------------------------------------------------------------------
\143\ deBanked, UCC-1 and UCC-3 Filings by Merchant Cash Advance
Companies & Alternative Business Lenders, <a href="https://debanked.com/merchant-cash-advance-resource/merchant-cash-advance-ucc/">https://debanked.com/merchant-cash-advance-resource/merchant-cash-advance-ucc/</a> (last
visited July 11, 2021).
---------------------------------------------------------------------------
The Bureau estimates the number of factors to be between 700-900
and assumes that most factors are providing financing to small
business.\144\
---------------------------------------------------------------------------
\144\ See Secured Fin. Found., 2019 Secured Finance: Market
Sizing & Impact Study Extract Report, at 15 (June 2019), <a href="https://www.sfnet.com/docs/default-source/data-files-and-research-documents/sfnet_market_sizing___impact_study_extract_f.pdf?sfvrsn=72eb7333_2">https://www.sfnet.com/docs/default-source/data-files-and-research-documents/sfnet_market_sizing___impact_study_extract_f.pdf?sfvrsn=72eb7333_2</a>
(estimating the number of factors at between 700 and 900).
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Finally, many government agencies and government-sponsored
enterprises provide or facilitate a significant proportion of small
business credit. As the flagship government lender, the Small Business
Administration managed in 2019 a portfolio of over $140 billion in
loans to small businesses, to which it added over $1 trillion in loans
extended as part of the COVID-19 emergency lending programs. Across
Federal, State, and municipal governments, the Bureau estimates that
there are likely over 100 government small business lending
programs.\145\ Additionally, the Farm Credit System reports that, as of
December 2019, the Farm Credit System contains a total of 72 banks and
associations.\146\ The Bureau assumes that all of these Farm Credit
System institutions are engaged in lending to small farms.
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\145\ In addition to several Federal small business lending
programs, States and major municipalities also often have one or
more programs of their own. One State and one municipal program in
each State would already total 100 government lending programs
across Federal, State, and municipal governments.
\146\ Fed. Farm Credit Banks Funding Corp., Farm Credit 2019
Annual Information Statement of the Farm Credit System, at 7 (Feb.
28, 2020), <a href="https://www.farmcreditfunding.com/ffcb_live/serve/public/pressre/finin/.pdf?assetId=395570">https://www.farmcreditfunding.com/ffcb_live/serve/public/pressre/finin/.pdf?assetId=395570</a>. The Bureau notes that Farm Credit
System banks do not report FFIEC Call Reports and are thus not
counted in the number of banks and savings associations discussed
above.
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[[Page 56370]]
E. Challenges for Women-Owned and Minority-Owned Small Businesses
Within the context of small business financing, women-owned and
minority-owned businesses often face relatively more challenges than
their counterparts. Specifically, women-owned and minority-owned small
businesses can be even more susceptible to the impact of economic
shocks and have a harder time accessing credit to survive and thrive in
better times.
Although women-owned and minority-owned businesses are found in
many industry sectors, women-owned businesses are concentrated in the
health care and social assistance sector, while minority-owned
businesses are primarily concentrated in the service sector, the
healthcare and social assistance sector, and the administrative
support, waste management and remediation sectors.\147\ During economic
downturns, such as the Great Recession and the financial crisis
resulting from the COVID-19 pandemic, women-owned and minority-owned
small businesses tend to fare worse than other small businesses. Women
and minority business owners have been disproportionately hurt by the
COVID-19 pandemic, with rates of business ownership dropping from
February to April 2020 by 41 percent, 32 percent, and 26 percent for
African American, Latinx, and Asian individuals, respectively, compared
with 17 percent for white individuals.\148\ Female business ownership
declined by 25 percent, compared with 20 percent for male
ownership.\149\
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\147\ White Paper at 12, 15.
\148\ Robert Fairlie, Stanford Inst. for Economic Policy
Research, Working Paper No. 20-022, The Impact of COVID-19 on Small
Business Owners: Evidence of Early Stage Losses from the April 2020
Current Population Survey, at 5 (May 2020), <a href="https://siepr.stanford.edu/sites/default/files/publications/20-022.pdf">https://siepr.stanford.edu/sites/default/files/publications/20-022.pdf</a>. The
authors define the rate of business ownership as the percentage of
the labor force that owns and is actively employed in a business as
their main job in the survey month. Id. at 3. As such, the decline
in business ownership could reflect owners not only exiting the
labor market but also switching to a different (wage and salary)
job. In many cases, these exit or switching trends were temporary
reactions to public health lockdowns and have since partially
reversed.
\149\ Id. at 6, 8.
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Women-owned and minority-owned small businesses often have smaller
cash reserves on average, leaving them less able to weather downturns
and credit crunches. For example, in February 2021, 39 percent of
women-owned businesses had one month or less in cash reserves, compared
with 29 percent of men-owned firms.\150\ And in around 90 percent of
majority Black and Hispanic communities, most businesses have fewer
than 14 days of cash buffer, while this is true of only 35 percent of
majority white communities.\151\ As a result, many small businesses,
especially those owned by women and minorities, may have had a greater
need for financing just as small business lenders began to approve
fewer loans in response to economic uncertainty. Loan approvals at
smaller banks dropped from 50 percent pre-pandemic to 12 percent in
April 2020 and have settled between 18 and 19 percent since June 2020;
the trend is similar for large banks, credit unions, and fintechs.\152\
---------------------------------------------------------------------------
\150\ Eric Groves, Cash Strapped SMBs, While 75% Of PPP Is Still
Available, Alignable (Feb. 9, 2021), <a href="https://www.alignable.com/forum/alignable-road-to-recovery-report-february-2021?utm_campaign=February&utm_medium=Press&utm_source=Press">https://www.alignable.com/forum/alignable-road-to-recovery-report-february-2021?utm_campaign=February&utm_medium=Press&utm_source=Press</a>.
\151\ JPMorgan Chase Inst., Place Matters: Small Business
Financial Health in Urban Communities, at 5 (Sept. 2019), <a href="https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/institute/pdf/institute-place-matters.pdf">https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/institute/pdf/institute-place-matters.pdf</a>.
\152\ Biz2Credit, Small Business Lending Index, <a href="https://www.biz2credit.com/small-business-lending-index">https://www.biz2credit.com/small-business-lending-index</a> (last visited July
27, 2021).
---------------------------------------------------------------------------
The PPP--part of the Federal government's response to the
pandemic--helped to keep many small businesses afloat, but a number of
factors prevented minority-owned small businesses from accessing PPP
loans as easily as other firms. For example, established banking
relationships between applicants and lending providers were often
critical to approvals in early PPP underwriting; \153\ many minority-
owned businesses did not have such relationships.\154\ Further, many
minority-owned firms are sole proprietorships and independent
contractors, both of which received delayed access to PPP loans.\155\
Unprofitable non-employer firms were also initially barred from
receiving loans.\156\ Although Black-owned firms are more likely to use
fintech providers, these lenders were only belatedly allowed to
disburse PPP funds.\157\ However, once fintech providers were allowed
to disburse PPP loans, Black borrowers in particular benefited from
this access, highlighting the ability of fintech firms to reach
minority-owned business borrowers.\158\
---------------------------------------------------------------------------
\153\ Sara Savat, Who you know matters, even when applying for
PPP loans, The Source, Newsroom, Wash. Univ. in St. Louis (Feb. 15,
2021), <a href="https://source.wustl.edu/2021/02/who-you-know-matters-even-when-applying-for-ppp-loans/">https://source.wustl.edu/2021/02/who-you-know-matters-even-when-applying-for-ppp-loans/</a> (previous lender relationship increased
likelihood of obtaining a PPP loan by 57 percent). See generally 86
FR 7271, 7280 (Jan. 27, 2021) (noting that many banks restricted
access to PPP loans to existing customers, which may run a risk of
violating the ECOA and Regulation B).
\154\ Claire Kramer Mills, Fed. Reserve Bank of N.Y., Double
Jeopardy: COVID-19's Concentrated Health and Wealth Effects in Black
Communities, at 6 (Aug. 2020), <a href="https://www.newyorkfed.org/medialibrary/media/smallbusiness/DoubleJeopardy_COVID19andBlackOwnedBusinesses">https://www.newyorkfed.org/medialibrary/media/smallbusiness/DoubleJeopardy_COVID19andBlackOwnedBusinesses</a> (arguing that a lack
of strong banking relationships among Black-owned firms may have led
to relatively lower rates of access to PPP loans for such firms);
Fed. Reserve Banks, Small Business Credit Survey: 2021 Report on
Firms Owned by People of Color, at ii (Apr. 15, 2021), <a href="https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2021/sbcs-report-on-firms-owned-by-people-of-color">https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2021/sbcs-report-on-firms-owned-by-people-of-color</a> (Small Business Credit
Survey of Firms Owned by People of Color) (finding that ``firms
owned by people of color tend to have weaker banking
relationships'').
\155\ Greg Iacurci, Coronavirus loan program delayed for
independent contractors and self-employed workers, CNBC (Apr. 3,
2020), <a href="https://www.cnbc.com/2020/04/03/delays-in-sba-loans-for-independent-contractors-self-employed-workers.html">https://www.cnbc.com/2020/04/03/delays-in-sba-loans-for-independent-contractors-self-employed-workers.html</a>.
\156\ Stacy Cowley, `It Was a Joke': Some Small Businesses Got
$1 Relief Loans, N.Y. Times (Jan. 11, 2021), <a href="https://www.nytimes.com/2021/01/11/business/small-businesses-ppp-covid.html">https://www.nytimes.com/2021/01/11/business/small-businesses-ppp-covid.html</a>
(observing that sole proprietorships were initially eligible for PPP
loans only if they were profitable); see also Stacy Cowley, Minority
Entrepreneurs Struggled to Get Small-Business Relief Loans, N.Y.
Times (Apr. 4, 2021), <a href="https://www.nytimes.com/2021/04/04/business/ppp-loans-minority-businesses.html">https://www.nytimes.com/2021/04/04/business/ppp-loans-minority-businesses.html</a> (noting that sole proprietorships
and independent contractor business structures are particularly
prevalent among minority-owned businesses, which led to minority-
owned businesses being disproportionately restricted from accessing
PPP loans during initial roll-out of the program).
\157\ Claire Kramer Mills, Fed. Reserve Bank of N.Y., Double
Jeopardy: COVID-19's Concentrated Health and Wealth Effects in Black
Communities, at 5-7 (Aug. 2020), <a href="https://www.newyorkfed.org/medialibrary/media/smallbusiness/DoubleJeopardy_COVID19andBlackOwnedBusinesses">https://www.newyorkfed.org/medialibrary/media/smallbusiness/DoubleJeopardy_COVID19andBlackOwnedBusinesses</a>.
\158\ Jessica Battisto et al., Liberty Street Economics, Fed.
Reserve Bank of N.Y., Who Benefited from PPP Loans by Fintech
Lenders? (May 27, 2021), <a href="https://libertystreeteconomics.newyorkfed.org/2021/05/who-benefited-from-ppp-loans-by-fintech-lenders.html">https://libertystreeteconomics.newyorkfed.org/2021/05/who-benefited-from-ppp-loans-by-fintech-lenders.html</a>.
---------------------------------------------------------------------------
Finally, applicants whose owners belong to protected categories may
have received different credit outcomes when applying for PPP loans,
although limitations in demographic information for PPP loans have
hindered fair lending analyses.\159\
---------------------------------------------------------------------------
\159\ Rocio Sanchez-Moyano, Fed. Reserve Bank of S.F., Paycheck
Protection Program Lending in the Twelfth Federal Reserve District
(Mar. 3, 2021), <a href="https://www.frbsf.org/community-development/publications/community-development-research-briefs/2021/february/ppp-lending-12th-district/">https://www.frbsf.org/community-development/publications/community-development-research-briefs/2021/february/ppp-lending-12th-district/</a> (citing matched-pair audit studies that
found discouragement and provision of incomplete information for
minority business owners seeking PPP loans); 86 FR 7271, 7280 (Jan.
27, 2021) (noting that facially neutral PPP policies such as
limiting loans to businesses with pre-existing relationships may run
a risk of violating the ECOA and Regulation B due to a
disproportionate impact on a prohibited basis).
---------------------------------------------------------------------------
Given the severity of the COVID-19 pandemic for small businesses
generally and its potentially disproportionate impact on women-owned
and minority-owned small businesses, it is essential to better
understand the small business financing landscape to maintain support
for this key part of the U.S. economy both during and after the
pandemic.
[[Page 56371]]
F. The Purposes and Impact of Section 1071
The Dodd-Frank Act sets forth the Bureau's purposes and mission. It
provides that a key component of the Bureau's fair lending work is to
ensure fair, equitable, and nondiscriminatory access to credit for both
individuals and their communities.\160\ And in passing section 1071,
Congress articulated two purposes for requiring the Bureau to collect
data on small business credit applications and loans--to ``facilitate
enforcement of fair lending laws'' and to ``enable communities,
governmental entities, and creditors to identify business and community
development needs and opportunities of women-owned, minority-owned, and
small businesses.'' \161\ Although the Dodd-Frank Act does not further
explain or clarify these dual statutory purposes, other Federal laws
shed light on both purposes. That is, a set of existing Federal laws
form the backdrop for the use of 1071 data to facilitate the
enforcement of fair lending laws, and to identify business and
community development needs of small businesses across the United
States.
---------------------------------------------------------------------------
\160\ See 12 U.S.C. 5493(c)(2)(A) (directing the Office of Fair
Lending and Equal Opportunity to provide ``oversight and enforcement
of Federal laws intended to ensure the fair, equitable, and
nondiscriminatory access to credit for both individuals and
communities that are enforced by the Bureau,'' including ECOA and
the Home Mortgage Disclosure Act).
\161\ ECOA section 704B(a).
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1. Facilitating Enforcement of Fair Lending Laws
Congress intended for section 1071 to ``facilitate enforcement of
fair lending laws,'' \162\ which include ECOA, the Home Mortgage
Disclosure Act of 1975 (HMDA),\163\ the Fair Housing Act (FHAct),\164\
and other Federal and State anti-discrimination laws.
---------------------------------------------------------------------------
\162\ Id.
\163\ 12 U.S.C. 2801 et seq.
\164\ 42 U.S.C. 3601 through 3619.
---------------------------------------------------------------------------
i. Equal Credit Opportunity Act (ECOA)
ECOA, which is implemented by Regulation B, applies to all
creditors. Congress first enacted ECOA in 1974 to require financial
institutions and other firms engaged in the extension of credit to
``make credit equally available to all creditworthy customers without
regard to sex or marital status.'' \165\ Two years later, Congress
expanded ECOA's scope to include age, race, color, religion, national
origin, receipt of public assistance benefits, and exercise of rights
under the Federal Consumer Credit Protection Act.\166\
---------------------------------------------------------------------------
\165\ Public Law 93-495, tit. V, section 502, 88 Stat. 1500,
1521 (1974).
\166\ See Equal Credit Opportunity Act Amendments of 1976,
Public Law 94-239, section 701(a), 90 Stat. 251, 251 (1976).
---------------------------------------------------------------------------
ECOA makes it unlawful for any creditor to discriminate against any
applicant with respect to any aspect of a credit transaction (1) on the
basis of race, color, religion, national origin, sex (including sexual
orientation and gender identity),\167\ marital status, or age (provided
the applicant has the capacity to contract); (2) because all or part of
the applicant's income derives from any public assistance program; or
(3) because the applicant has in good faith exercised any right under
the Consumer Credit Protection Act.\168\ In keeping with the broad
reach of the statute's prohibition, Regulation B covers creditor
activities before, during, and after the extension of credit.\169\
Regulation B also bars creditors from making any oral or written
statement, in advertising or otherwise, to applicants or prospective
applicants that would discourage, on a prohibited basis, a reasonable
person from making or pursuing an application.\170\ Regulation B also
generally prohibits creditors from making inquiries about whether an
applicant is a member of certain protected categories.\171\
---------------------------------------------------------------------------
\167\ In March 2021, the Bureau issued an interpretive rule
clarifying that the scope of ECOA's and Regulation B's prohibition
on credit discrimination on the basis of sex encompasses
discrimination based on sexual orientation and gender identity,
including discrimination based on actual or perceived nonconformity
with sex-based or gender-based stereotypes and discrimination based
on an applicant's associations. 86 FR 14363 (Mar. 16, 2021). See
also Press Release, Bureau of Consumer Fin. Prot., CFPB Clarifies
That Discrimination by Lenders on the Basis of Sexual Orientation
and Gender Identity Is Illegal (Mar. 9, 2021), <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-clarifies-discrimination-by-lenders-on-basis-of-sexual-orientation-and-gender-identity-is-illegal/">https://www.consumerfinance.gov/about-us/newsroom/cfpb-clarifies-discrimination-by-lenders-on-basis-of-sexual-orientation-and-gender-identity-is-illegal/</a>. The interpretive rule states that an example
of discriminatory sex-based or gender-based stereotyping occurs if a
small business lender discourages a small business owner appearing
at its office from applying for a business loan and tells the
prospective applicant to go home and change because, in the view of
the creditor, the small business customer's attire does not accord
with the customer's gender. 86 FR at 14365.
\168\ 15 U.S.C. 1601 et seq.
\169\ See Regulation B Sec. 1002.4(a) and (b).
\170\ Id. Sec. 1002.4(b).
\171\ Id. Sec. 1002.5(b) through (d).
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The Bureau has recognized the following methods of proving lending
discrimination under ECOA and Regulation B: Overt evidence of
discrimination, evidence of disparate treatment, and evidence of
disparate impact.\172\ Overt evidence of discrimination exists when a
creditor blatantly discriminates on a prohibited basis.\173\ Disparate
treatment occurs when a creditor treats an applicant differently based
on a prohibited basis such as race or national origin.\174\ Disparate
impact occurs when a creditor employs facially neutral policies or
practices that have an adverse effect or impact on a member of a
protected class unless the facially neutral policies or practices meet
a legitimate business need that cannot reasonably be achieved by means
that are less disparate in their impact.\175\
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\172\ See Bureau of Consumer Fin. Prot., CFPB Bulletin 2012-04
(Fair Lending), Lending Discrimination (Apr. 18, 2012), <a href="https://files.consumerfinance.gov/f/201404_cfpb_bulletin_lending_discrimination.pdf">https://files.consumerfinance.gov/f/201404_cfpb_bulletin_lending_discrimination.pdf</a> (Interagency Policy
Statement on Discrimination in Lending) (concurring with Interagency
Task Force on Fair Lending, Policy Statement on Discrimination in
Lending, 59 FR 18266 (Apr. 15, 1994)).
\173\ See Interagency Policy Statement on Discrimination in
Lending at 18268.
\174\ See Regulation B comment 4(a)-1 (stating that
``[d]isparate treatment on a prohibited basis is illegal whether or
not it results from a conscious intent to discriminate''); Bureau of
Consumer Fin. Prot., Equal Credit Opportunity Act (ECOA) Examination
Procedures, at 1 (Oct. 30, 2015), <a href="https://files.consumerfinance.gov/f/documents/201510_cfpb_ecoa-narrative-and-procedures.pdf">https://files.consumerfinance.gov/f/documents/201510_cfpb_ecoa-narrative-and-procedures.pdf</a> (ECOA
Examination Procedures); see also Interagency Policy Statement on
Discrimination in Lending at 18268.
\175\ See Regulation B comment 6(a)-2; ECOA Examination
Procedures at 1; see also Interagency Policy Statement on
Discrimination in Lending at 18269.
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Multiple Federal regulators can enforce violations of ECOA and
Regulation B and apply various penalties. Enforcement and penalties for
those who violate ECOA and Regulation B are set forth in 15 U.S.C.
1691e(b) and 12 CFR 1002.16. Violations may also result in civil money
penalties, which are governed by 12 U.S.C. 5565(c)(3). The Bureau and
multiple other Federal regulators have the statutory authority to bring
actions to enforce the requirements of ECOA.\176\ These regulators have
the authority to engage in research, conduct investigations, file
administrative complaints, hold hearings, and adjudicate claims through
the administrative enforcement process regarding ECOA. Regulators also
have independent litigation authority and can file cases in Federal
court alleging violations of fair lending laws under their
jurisdiction. Like other Federal regulators who are assigned
enforcement authority under section 704 of ECOA, the Bureau is required
to refer matters to the Department of Justice (DOJ) when it has reason
to
[[Page 56372]]
believe that a creditor has engaged in a pattern or practice of lending
discrimination.\177\ Private parties may also bring claims under the
civil enforcement provisions of ECOA, including individual and class
action claims against creditors for actual and punitive damages for any
violation of ECOA.\178\
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\176\ These regulators include the OCC, the Board, the FDIC, the
NCUA, the Surface Transportation Board, the Civil Aeronautics Board,
the Secretary of Agriculture, the Farm Credit Administration, the
Securities and Exchange Commission, the SBA, the Secretary of
Transportation, the Bureau, and the FTC. See 15 U.S.C. 1691c;
Regulation B Sec. 1002.16(a).
\177\ See 15 U.S.C. 1691e(h).
\178\ 15 U.S.C. 1691e(a); Regulation B Sec. 1002.16(b)(1).
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ii. Home Mortgage Disclosure Act (HMDA)
HMDA, implemented by the Bureau's Regulation C (12 CFR part 1003),
requires lenders who meet certain coverage tests to report detailed
information to their Federal supervisory agencies about mortgage
applications and loans at the transaction level. These reported data
are a valuable resource for regulators, researchers, economists,
industry, and advocates assessing housing needs, public investment, and
possible discrimination as well as studying and analyzing trends in the
mortgage market for a variety of purposes, including general market and
economic monitoring. There may be some overlap between what is required
to be reported under HMDA and what is covered by section 1071 for
certain mortgage applications and loans for women-owned, minority-
owned, and small businesses.
A violation of HMDA and Regulation C is subject to administrative
sanctions, including civil money penalties. Compliance can be enforced
by the Bureau, the U.S. Department of Housing and Urban Development
(HUD), the FDIC, the Board, the National Credit Union Administration
(NCUA), or the Office of the Comptroller of Currency (OCC). These
regulators have the statutory authority to bring actions to enforce the
requirements of HMDA and to engage in research, conduct investigations,
file administrative complaints, hold hearings, and adjudicate claims
through the administrative enforcement process regarding HMDA.
iii. Fair Housing Act (FHAct)
Title VIII of the Civil Rights Act of 1968, as amended (Fair
Housing Act, or FHAct), prohibits discrimination in the sale, rental,
or financing of dwellings and in other housing-related activities
because of race, color, religion, sex (including sexual orientation and
gender identity),\179\ disability,\180\ familial status, or national
origin.\181\ The Fair Housing Act \182\ and its implementing
regulations specifically prohibit discrimination in the making of
loans,\183\ the purchasing of loans,\184\ and in setting the terms and
conditions for making loans available,\185\ without reference to
consumers, legal entities, or the purpose of the loan being made,
although these prohibitions relate exclusively to dwellings.\186\ As
with ECOA, the courts have recognized three methods of proof of lending
discrimination under the FHAct: (1) Overt evidence of discrimination;
(2) evidence of disparate treatment; and (3) evidence of disparate
impact.\187\
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\179\ See U.S. Dep't of Hous. & Urban Dev., Implementation of
Executive Order 13988 on the Enforcement of the Fair Housing Act
(Feb. 11, 2021), <a href="https://www.hud.gov/sites/dfiles/PA/documents/HUD_Memo_EO13988.pdf">https://www.hud.gov/sites/dfiles/PA/documents/HUD_Memo_EO13988.pdf</a>.
\180\ The Bureau uses the term ``disability'' to refer to what
the FHA and its implementing regulations term a ``handicap'' because
that is the preferred term. See, e.g., Hunt v. Aimco Props., L.P.,
814 F.3d 1213, 1218 n.1 (11th Cir. 2016) (noting the term disability
is generally preferred over handicap).
\181\ 42 U.S.C. 3601 through 3619, 3631.
\182\ 42 U.S.C. 3605(b) (noting that for purposes of 3605(a), a
``residential real estate-related transaction'' includes the making
or purchasing of loans or providing other financial assistance for
purchasing, constructing, improving, repairing, or maintaining a
dwelling, or transactions secured by residential real estate).
\183\ 24 CFR 100.120.
\184\ 24 CFR 100.125.
\185\ 24 CFR 100.130.
\186\ A ``dwelling,'' as defined by the Fair Housing Act, is any
building, structure, or portion thereof which is occupied as, or
designed or intended for occupancy as, a residence by one or more
families, and any vacant land which is offered for sale or lease for
the construction or location thereon of any such building,
structure, or portion thereof. 42 U.S.C. 3602(b).
\187\ See Interagency Policy Statement on Discrimination in
Lending at 18268. See also 78 FR 11459, 11459 (Feb. 15, 2013)
(stating that HUD, which is statutorily charged with the authority
and responsibility for interpreting and enforcing the Fair Housing
Act and with the power to make rules implementing the Act, ``has
long interpreted the Act to prohibit practices with an unjustified
discriminatory effect, regardless of whether there was an intent to
discriminate'').
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The DOJ and HUD are jointly responsible for enforcing the Fair
Housing Act. The Fair Housing Act authorizes the HUD Secretary to issue
a Charge of Discrimination on behalf of aggrieved persons following an
investigation and a determination that reasonable cause exists to
believe that a discriminatory housing practice has occurred.\188\ The
DOJ may bring lawsuits where there is reason to believe that a person
or entity is engaged in a ``pattern or practice'' of discrimination or
where a denial of rights to a group of persons raises an issue of
general public importance,\189\ or where a housing discrimination
complaint has been investigated by HUD, HUD has issued a Charge of
Discrimination, and one of the parties to the case has ``elected'' to
go to Federal court.\190\ In FHAct cases, HUD and the DOJ can obtain
injunctive relief, including affirmative requirements for training and
policy changes, monetary damages and, in pattern or practice cases,
civil penalties.\191\
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\188\ 42 U.S.C. 3610(g)(1) and (2).
\189\ See 42 U.S.C. 3614(a).
\190\ 42 U.S.C. 3612(o)(1).
\191\ See 42 U.S.C. 3612, 3614.
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Upon receipt of a complaint alleging facts that may constitute a
violation of the FHAct or upon receipt of information from a consumer
compliance examination or other information suggesting a violation of
the FHAct, Federal executive agencies forward such facts or information
to HUD and, where such facts or information indicate a possible pattern
or practice of discrimination in violation of the FHAct, to the
DOJ.\192\ Private parties may also bring claims under the civil
enforcement provisions of FHAct.\193\
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\192\ 59 FR 2939, 2939 (Jan. 17, 1994).
\193\ See 42 U.S.C. 3613.
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iv. Other Fair Lending Laws
Several other Federal statutes seek to promote fair lending. The
CRA seeks affirmatively to encourage institutions to help to meet the
credit needs of the entire community served by each institution covered
by the statute, and CRA ratings take into account lending
discrimination by those institutions.\194\ The Americans with
Disabilities Act of 1990 prohibits discrimination against persons with
disabilities in the provision of goods and services, including credit
services.\195\ Sections 1981\196\ and 1982 \197\ of the Federal Civil
Rights Acts are broad anti-discrimination laws that have been applied
to many aspects of credit transactions.\198\
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\194\ See 12 U.S.C. 2901 et seq.
\195\ See 42 U.S.C. 12101 et seq.
\196\ 42 U.S.C. 1981(a).
\197\ 42 U.S.C. 1982.
\198\ See, e.g., Jackson v. Novastar Mortg., Inc., 645 F. Supp.
2d 636 (W.D. Tenn. 2007) (motion to dismiss claim that defendants
violated sections 1981 and 1982 by racial targeting and by offering
credit on less favorable terms on the basis of race denied); Johnson
v. Equicredit Corp., No. 01-CIV-5197, 2002 U.S. Dist. LEXIS 4817
(N.D. Ill. Mar. 22, 2002) (predatory lending/reverse redlining case
brought pursuant to section 1981); Hargraves v. Cap. City Mortg.
Corp., 140 F. Supp. 2d 7 (D.D.C. 2000) (predatory lending/reverse
redlining case brought under both sections 1981 and 1982),
reconsideration granted in part, denied in part, 147 F. Supp. 2d 1
(D.D.C. 2001) (section 1981 claim dismissed for lack of standing,
but not section 1982 claim); Doane v. Nat'l Westminster Bank USA,
938 F. Supp. 149 (E.D.N.Y. 1996) (mortgage redlining case brought
under sections 1981 and 1982); Fairman v. Schaumberg Toyota, Inc.,
No. 94-CIV-5745, 1996 U.S. Dist. LEXIS 9669 (N.D. Ill. July 10,
1996) (section 1981 suit over allegedly predatory credit scheme
targeting African Americans and Hispanics); Steptoe v. Sav. of Am.,
800 F. Supp. 1542 (N.D. Ohio 1992) (mortgage redlining case brought
under sections 1981 and 1982 and the Fair Housing Act); Evans v.
First Fed. Sav. Bank of Ind., 669 F. Supp. 915 (N.D. Ind. 1987)
(section 1982 can be used in mortgage lending discrimination case);
Assocs. Home Equity Servs. v. Troup, 778 A.2d 529 (N.J. 2001)
(predatory lending/reverse redlining case brought pursuant to
section 1981).
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[[Page 56373]]
Many States and municipalities have also enacted fair lending, fair
housing, and/or civil rights laws (often modeled on their Federal
counterparts) that seek to broadly prohibit credit discrimination,
including protections for business credit.\199\ Some of these laws
expressly enumerate protections beyond those expressly enumerated in
the Federal statutes.\200\
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\199\ See, e.g., Cal. Civ. Code 51 and 51.5 and Cal. Gov't Code
12955; Colo. Rev. Stat. 24-34-501(3) and 5-3-210; Conn. Gen. Stat.
46a-81e, 46a-81f, and 46a-98; Del. Code Ann. tit. 6, 4604; D.C. Code
2-1402.21; Haw. Rev. Stat. 515-3 and 515-5; 775 Ill. Comp. Stat. 5/
1-102, 5/1-103, 5/4-102, 5/3-102, and 5/4-103; Iowa Code 216.8A and
216.10; Me. Rev. Stat. tit. 5, 4553(5-C) and (9-C), 4595 to 4598,
and 4581 to 4583; Md. Code Ann. State Gov't 20-705, 20-707, and 20-
1103; Mass. Gen. Laws ch. 151B, 4(3B), (14); Minn. Stat. 363A.03
(Subd. 44), 363A.09(3), 363A.16 (Subds. 1 and 3), and 363A.17; N.H.
Rev. Stat. Ann. 354-A:10; N.J. Stat. Ann. 10:5-12(i); N.M. Stat.
Ann. 28-1-7; N.Y. Civ. Rights Law 40-c(2); N.Y. Exec. Law 296-A; Or.
Rev. Stat. 174.100(7) and 659A.421; R.I. Gen. Laws 34-37-4(a)
through (c), 34-37-4.3, and 34-37-5.4; Va. Code Ann. 6.2-501(B)(1),
15.2-853, and 15.2-965; Vt. Stat. Ann. tit. 8, 10403 and tit. 9,
2362, 2410, and 4503(a)(6); Wash. Rev. Code 49.60.030, 49.60.040
(14), (26), and (27), 49.60.175, and 49.60.222; Wis. Stat. 106.50
and 224.77. There are also a number of municipalities that have
enacted credit discrimination ordinances. See, e.g., Austin City
Code 5-1-1 et seq.; N.Y.C. Admin. Code 8-101 and 8-107 et seq.; S.F.
Police Code 3304(a) et seq.
\200\ See, e.g., Mass. Gen. Laws ch. 151B, 4(3B) (prohibiting
discrimination based on genetic information); N.J. Stat. Ann. 10:5-1
to 10:5-42 (same); D.C. Code 2-1401.02 and 2-1402.21 (extending
protections from discrimination to domestic violence victims); Wis.
Stat. 224.77 (same); N.Y. Exec. Law 296-a (prohibiting
discrimination on the basis of military status) (credit
transactions); N.Y. Exec. Law 296(5)(a) through (c) (same) (housing
transactions); Wash. Rev. Code 49.60.176 (protecting veterans and
honorably discharged service members); 775 Ill. Comp. Stat. 5/3-101
and 5/4-101 (prohibiting discrimination based on an applicant's
unfavorable discharge from the military); 815 Ill. Comp. Stat. 140/
1a (same). Several other State statutes also prohibit discrimination
based on the geographic area of residence. See, e.g., 815 Ill. Comp.
Stat. 120/1 to 120/6; Iowa Code 535A.1 to 535A.9; Md. Code Ann.,
Com. Law 12-603 (West); Mich. Comp. Laws 445.1601 to 445.1614; Minn.
Stat. 363A.09(3)(c); N.Y. Banking Law 9-f; Wash. Rev. Code 30.04.500
to 30.04.515.
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v. Facilitating Enforcement
In order for the 1071 rule to facilitate enforcement of the fair
lending laws discussed above, the Bureau believes that it must collect
and make available sufficient data to help the public and regulators
identify potentially discriminatory lending patterns that could
constitute violations of fair lending laws. Financial regulators and
enforcement agencies need a consistent and comprehensive dataset for
all financial institutions subject to 1071 reporting in order to also
use 1071 data in their initial prioritization, peer analysis, redlining
reviews, and screening processes to select institutions for monitoring,
examination, or investigation. Section 1071 data would facilitate more
efficient fair lending examinations. For example, regulators could use
pricing and other data to prioritize fair lending examinations--without
such data, some financial institutions would face unnecessary
examination burden while others whose practices warrant closer review
would not receive sufficient scrutiny.
Moreover, as discussed in part V below, the Bureau believes
specific aspects of its proposal offer particular benefits for the
enforcement of fair lending laws. For example, the Bureau's proposal
regarding transactional and institutional coverage would allow
community groups and government agencies to include most of the small
business financing market in fair lending analyses. The proposed
inclusion of pricing data fields such as interest rate and fees would
provide information on disparities in pricing outcomes, and data fields
such as gross annual revenue, denial reasons, and time in business
would allow for a more refined analysis and understanding of
disparities in both underwriting and pricing outcomes. While 1071 data
alone generally will not offer proof of compliance with fair lending
laws, regulators, community groups, researchers, and financial
institutions will be able to use 1071 data to identify potential
disparities in small business lending based on disaggregated categories
of race and ethnicity. Overall, the data collection under 1071 rule
will allow, for the first time, for comprehensive and market-wide fair
lending risk analysis.
2. Identifying Business and Community Development Needs
The second purpose of section 1071 is to enable communities,
governmental entities, and creditors to identify business and community
development needs and opportunities of women-owned, minority-owned, and
small businesses.\201\
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\201\ ECOA section 704B(a).
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Section 1071 does not expressly define the phrase ``business and
community development needs.'' However, other Federal statutes and
regulations, including the CRA and the Riegle Community Development and
Regulatory Improvement Act of 1994,\202\ reference or define the
phrases ``business development'' and ``community development'' and can
help explain what it means to enable communities, governmental
entities, and creditors to ``identify business and community
development needs and opportunities.''
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\202\ Public Law 103-325, tit. I, section 102, 108 Stat. 2160,
2163 (1994) (12 U.S.C. 4701 through 4719).
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The Bureau believes, based on its consideration of these other
Federal statutes and regulations, that the proposed 1071 rule would
provide more data to the public--including communities, governmental
entities, and creditors--for analyzing whether financial institutions
are serving the credit needs of their small business customers. In
addition, with 1071 data, the public would be better able to understand
access to and sources of credit in particular communities or
industries, such as a higher concentration of risky loan products in a
given community, and to identify the emergence of new loan products,
participants, or underwriting practices. The data would not only assist
in identifying potentially discriminatory practices, but would also
contribute to a better understanding of the experiences that members
within certain communities may share in the small business financing
market.
i. Community Reinvestment Act (CRA)
The CRA, a part of the Housing and Community Development Act, was
passed by Congress in 1977, which found that ``regulated financial
institutions have continuing and affirmative obligation to help meet
the credit needs of the local communities in which they are
chartered.'' \203\ As such, one of the statutory purposes of the CRA is
to encourage such institutions to help meet the credit needs of the
local communities in which they are chartered consistent with the safe
and sound operation of such institutions.\204\
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\203\ 12 U.S.C. 2901(a)(3).
\204\ 12 U.S.C. 2901(b).
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The legislative history for the CRA suggests that the concerns
motivating the Act's passage included certain practices by banks
including redlining (i.e., declining to extend credit in neighborhoods
populated by ethnic or racial minorities) \205\ and community
[[Page 56374]]
disinvestment (i.e., taking deposits from lower-income areas, often
populated by ethnic or racial minorities, without extending credit or
banking services to residents of those areas).\206\ The CRA requires
the ``appropriate Federal financial supervisory agency'' of a given
depository institution to ``prepare a written evaluation of the
institution's record of meeting the credit needs of its entire
community, including low- and moderate-income neighborhoods.'' \207\
These requirements were first implemented by a 1978 rulemaking,\208\
and were amended in 1995 \209\ and 2005.\210\ These rulemakings,
adopted by each of the agencies responsible for ensuring compliance
with the CRA, established specific performance measures,\211\ requiring
banks to disclose information about small business, small farm and
community development lending.\212\
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\205\ See H.R. Rep. No. 561, 94th Cong., 1st Sess. 4 (1975)
(``[The practice of redlining] increasingly has served to polarize
elements of our society . . . . As polarization intensifies,
neighborhood decline accelerates.''), reprinted in 1975 U.S.C.C.A.N.
2303, 2305-06.
\206\ Robert C. Art, Social Responsibility in Bank Credit
Decisions: The Community Reinvestment Act One Decade Later, 18 Pac.
L.J. 1071, 1076-77 & n.23 (1987) (citing 123 Cong. Rec. S8958 (daily
ed. June 6, 1977), which stated that Sen. Proxmire, the
congressional sponsor of the Act described redlining as ``the fact
that banks and savings and loans will take their deposits from a
community and instead of reinvesting them in that community, they
will invest them elsewhere, and they will actually or figuratively
draw a red line on a map around the areas of their city,'' further
noting that those lines are drawn ``sometimes in the inner city,
sometimes in the older neighborhoods, sometimes ethnic and sometimes
black . . . .'').
\207\ 12 U.S.C. 2906(a)(1).
\208\ 43 FR 47144 (Oct. 12, 1978).
\209\ 60 FR 22156 (May 4, 1995).
\210\ 70 FR 44256 (Aug. 2, 2005).
\211\ 12 CFR 228.11.
\212\ See, e.g., 12 CFR 25.42, 228.11.
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The agencies tasked with ensuring compliance--including the
OCC,\213\ the Board,\214\ and the FDIC \215\--evaluate each insured
depository institution's record in helping meet the credit needs of its
entire community.\216\ Overall, the CRA and its regulations generate
data that help agencies and the public at large identify instances of
redlining, community disinvestment, and geographical areas that are
``banking deserts.'' \217\ The CRA regulations of the Board and the
FDIC currently have the same definitions of ``community development''
that include banking and credit services that support the following:
(1) Affordable housing for low- and moderate-income (LMI) individuals;
\218\ (2) community services for LMI individuals; \219\ (3) activities
that promote economic development by financing small business and small
farms; \220\ and (4) activities that revitalize or stabilize LMI
geographies, disaster areas, and certain distressed or underserved
middle-income areas based on other factors.\221\
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\213\ 12 CFR part 25.
\214\ 12 CFR part 228.
\215\ 12 CFR parts 345, 195.
\216\ Most specifically, that record is taken into account in
considering an institution's application for deposit facilities,
including mergers and acquisitions with other financial institutions
and the opening of bank branches.
\217\ OCC regulations define ``CRA desert'' as an area that has
``significant unmet community development or retail lending needs''
and where: (1) Few banks have branches or non-branch deposit-taking
facilities, (2) There is ``less retail or community development
lending than would be expected based on demographic or other
factors,'' or (3) The area ``lacks community development
organizations or infrastructure.'' 12 CFR 25.03.
\218\ 12 CFR 228.12(g)(1), 345.12(g)(1).
\219\ 12 CFR 228.12(g)(2), 345.12(g)(2).
\220\ 12 CFR 228.12(g)(3), 345.12(g)(3).
\221\ 12 CFR 228.12(g)(4), 345.12(g)(4).
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In September 2020, the Board announced an advance notice of
proposed rulemaking to update its CRA regulations, specifically to more
effectively meet the needs of LMI communities and address inequities in
credit access.'' \222\ As part of this exercise, the Board requested
feedback on potential revisions to its data collection and reporting
requirements.\223\ The Board suggested that more granular reporting of
community development loan and investment data may be needed to aid
community development and improve compliance with the CRA, noting that
the lack of such data ``means that there is no aggregate community
development data at a local level available to create the local
benchmarks for the community development financing metric.'' \224\ As
such, the publication of 1071 data would also be a useful resource for
supporting community development efforts under the CRA.
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\222\ 85 FR 66410 (Oct. 19, 2020).
\223\ Id. at 66459-63.
\224\ Id. at 66462.
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In June 2020, the OCC promulgated a final rule that adopted a
broader definition of ``community development'' than the one used by
the Board and the FDIC.\225\ However, in July 2021, the OCC announced
that it was reconsidering the June 2020 revisions to its CRA
regulations,\226\ and that it may join the Board's consideration of
proposed revisions to strengthen bank compliance with CRA
regulations.\227\
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\225\ The FDIC initially joined the OCC in issuing its early
2020 proposed rule to expand the definition of ``community
development'' for purposes of CRA compliance, but it did not join
the OCC in its issuance of a rule finalizing that proposal. Compare
85 FR 1204 (Jan. 9, 2020) (joint FDIC-OCC proposal to amend the
agencies' respective CRA regulations), with 85 FR 34734 (June 5,
2020) (OCC final rule amending CRA regulations). The rule added to
the range of activities that comprise ``community development'' for
purposes of the OCC's revisions to the CRA regulations.
Specifically, the OCC expanded the qualifying activities criteria to
capture activities the OCC stated were consistent with the statutory
purpose of the CRA but that generally did not receive credit under
CRA regulations prior to the OCC's revisions, including certain
activities in identified ``areas of need beyond LMI areas (i.e.,
underserved areas, distressed areas, disaster areas, Indian country
and other tribal and native lands)'' as well as those activities
that ``benefit a whole community, while maintaining an appropriate
focus on LMI neighborhoods.'' 85 FR 34734, 34735 (June 5, 2020); see
also 12 CFR 25.04(a)(1) (stating that a retail loan, a community
development loan, a community development investment, or a community
development service ``that helps to meet the credit needs of a
bank's entire community, including low- and moderate-income
communities, is a qualifying activity if it meets the criteria in
this section at the time the activity is originated, made, or
conducted''); 12 CFR 25.04(b)(3) (listing 12 sets of activities that
qualify as community development loans, investments and services).
\226\ Off. of the Comptroller of the Currency, OCC Statement on
Rescinding its 2020 Community Reinvestment Act Rule (News Release
2021-76) (July 20, 2021), <a href="https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-76.html">https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-76.html</a> (stating that the OCC will propose
rescinding its June 2020 CRA final rule).
\227\ Id. (noting the crucial nature of strengthening the CRA
jointly with the Board and FDIC and signaling intention to issue a
joint notice of proposed rulemaking building on the ANPR proposed by
the Board in September 2020).
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ii. Community Development Financial Institution Fund (CDFI Fund)
The Riegle Community Development and Regulatory Improvement Act of
1994 authorized the CDFI Fund.\228\ In passing that statute, Congress
found that many of the Nation's urban, rural, and Native American
communities face ``critical social and economic problems arising in
part from the lack of economic growth, people living in poverty, and
the lack of employment and other opportunities.'' \229\
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\228\ 12 U.S.C. 4701(b).
\229\ 12 U.S.C. 4701(a)(1).
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To address these problems, Congress created the CDFI Fund to
``promote economic revitalization and community development'' through
investment in and assistance to CDFIs, including enhancing the
liquidity of CDFIs.\230\
---------------------------------------------------------------------------
\230\ 12 U.S.C. 4701(b).
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The concept of community development is central to the operation of
the CDFI Fund. While CDFI Fund regulations do not directly define that
term, any entity applying for CDFI certification must have ``promoting
community development'' as its ``primary mission.'' \231\ In making
this determination, the CDFI Fund considers whether the activities of
the entity are purposefully directed toward improving the social and/or
economic conditions of underserved people, which may include low-income
persons or persons
[[Page 56375]]
who lack adequate access to capital and financial services and
residents of economically distressed communities.\232\
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\231\ 12 CFR 1805.201(b)(1).
\232\ Id.
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The CDFI Fund collects data from the recipients of its financial
and technical assistance, shedding some light on the extent of
community development in the areas where CDFIs operate.\233\ The CDFI
Fund also publishes the data it receives with appropriate redactions to
protect privacy interests.\234\ However, given that CDFIs comprise a
relatively small share of the overall small business lending market,
section 1071 would materially enhance understanding of the broader
extent of community development outside of areas where CDFIs already
operate. The data from a 1071 rulemaking would also likely augment the
data the CDFI Fund already receives.
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\233\ 12 CFR 1805.803(e) (requiring recipients of technical and
financial assistance to provide to the CDFI Fund certain information
and documentation).
\234\ 12 CFR 1805.803(e)(4).
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3. Potential Impact of Section 1071 Data
A section 1071 rule would provide on an annual basis application-
level data on small business credit, including certain protected
demographic information about applicants and their principal owners.
This would include information on applications for credit that are
originated, as well as those that are denied, withdrawn, incomplete, or
approved by the financial institution but not accepted by the
applicant. This information would enable stakeholders of all kinds in
the small business lending market to gain unprecedented insight into
trends in small business lending, specifically with respect to women-
owned and minority-owned small businesses. It would also provide
insight into the interaction of supply and demand over time.
In terms of facilitating fair lending enforcement, interested
government agencies and other stakeholders would be able to use 1071
data to analyze potential instances of practices resulting in the
disparate treatment of or disparate impact on women- and minority-owned
small businesses, using statistical methods to identify possible fair
lending risks.
Regarding the identification of business and community development
needs, the data that would be made available by the Bureau under this
rulemaking, if finalized as proposed, would help government entities
and public and private lenders identify and target sub-segments of the
market that remain underserved, facilitating entrepreneurship and
business development in those communities.
The advancement of both statutory purposes of section 1071--
facilitating fair lending enforcement and identifying business and
community development needs--in turn will support small businesses
across all sectors of the economy, which are fundamental to the
economic health of the U.S. and which have been hard hit by recent
economic and financial crises. The use of data that would be provided
pursuant to regulations under section 1071 can both support the
underlying purposes of section 1071 and help the economy as a whole.
For example, according to one estimate, fair and equitable lending to
Black entrepreneurs could have added $13 trillion in business revenue
over the last 20 years and created 6 million jobs.\235\ As the economy
recovers from the effects of the COVID-19 pandemic, data collected and
published pursuant to regulations implementing section 1071 would help
to support equitable and sustainable growth and prosperity in all
communities in the U.S.
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\235\ Citigroup, Citi GPS: Global Perspectives & Solutions,
Closing the Racial Inequality Gaps: The Economic Cost of Black
Inequality in the U.S., at 4 (Sept. 2020), <a href="https://ir.citi.com/NvIUklHPilz14Hwd3oxqZBLMn1_XPqo5FrxsZD0x6hhil84ZxaxEuJUWmak51UHvYk75VKeHCMI%3D">https://ir.citi.com/NvIUklHPilz14Hwd3oxqZBLMn1_XPqo5FrxsZD0x6hhil84ZxaxEuJUWmak51UHvYk75VKeHCMI%3D</a>.
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4. Bureau Priorities
On June 2, 2021, the Bureau announced as priorities action to
address issues of pervasive racial injustice and the long-term economic
impacts of the COVID-19 pandemic on consumers.\236\ The Acting Director
explained that the Bureau will use all of its tools and authority--
including rulemaking--to protect and fight for fairness for all
consumers in financial markets.\237\ The Bureau believes that
implementing the section 1071 data collection, maintenance, and
reporting obligations established in the Dodd-Frank Act would advance
those priorities.
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\236\ Blog post, Dave Uejio, Acting Director, Bureau of Co
[…truncated; see source link]Indexed from Federal Register on October 8, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.