Rule2023-07230
Small Business Lending Under the Equal Credit Opportunity Act (Regulation B)
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
May 31, 2023
Effective
August 29, 2023
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Bureau (CFPB or Bureau) is 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, covered financial institutions are required to collect and report to the CFPB data on applications for credit for small businesses, including those that are owned by women or minorities. The final rule also addresses the CFPB's approach to privacy interests and the publication of data; shielding certain demographic data from underwriters and other persons; recordkeeping requirements; enforcement provisions; and the rule's effective and compliance dates.
Full Text
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[Federal Register Volume 88, Number 104 (Wednesday, May 31, 2023)]
[Rules and Regulations]
[Pages 35150-35571]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-07230]
[[Page 35149]]
Vol. 88
Wednesday,
No. 104
May 31, 2023
Part III
Consumer Financial Protection Bureau
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12 CFR Part 1002
Small Business Lending Under the Equal Credit Opportunity Act
(Regulation B); Final Rule
Federal Register / Vol. 88, No. 104 / Wednesday, May 31, 2023 / Rules
and Regulations
[[Page 35150]]
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CONSUMER FINANCIAL PROTECTION BUREAU
12 CFR Part 1002
[Docket No. CFPB-2021-0015]
RIN 3170-AA09
Small Business Lending Under the Equal Credit Opportunity Act
(Regulation B)
AGENCY: Consumer Financial Protection Bureau.
ACTION: Final rule.
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SUMMARY: The Consumer Financial Protection Bureau (CFPB or Bureau) is
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, covered financial institutions are required to
collect and report to the CFPB data on applications for credit for
small businesses, including those that are owned by women or
minorities. The final rule also addresses the CFPB's approach to
privacy interests and the publication of data; shielding certain
demographic data from underwriters and other persons; recordkeeping
requirements; enforcement provisions; and the rule's effective and
compliance dates.
DATES:
Effective date: This final rule is effective August 29, 2023.
Compliance dates: Covered financial institutions must comply with
the final rule beginning October 1, 2024, April 1, 2025, or January 1,
2026, as set forth in Sec. 1002.114(b).
FOR FURTHER INFORMATION CONTACT: Camille Gray, Paralegal Specialist;
Kris Andreassen, Pavitra Bacon, Joseph Devlin, Amy Durant, Angela Fox,
Caroline Hong, David Jacobs, Kathryn Lazarev, Lawrence Lee, Adam Mayle,
Kristen Phinnessee, or Melissa Stegman, 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#4605001604190725252335352f242f2a2f323f062520362468212930"><span class="__cf_email__" data-cfemail="8dcecbddcfd2cceeeee8fefee4efe4e1e4f9f4cdeeebfdefa3eae2fb">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Summary of the Final Rule
In 2010, Congress passed the Dodd-Frank Act. Section 1071 of that
Act \1\ amended ECOA \2\ to require that financial institutions collect
and report to the CFPB certain data regarding applications for credit
for women-owned, minority-owned, and small businesses. 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\ Public Law 111-203, tit. X, section 1071, 124 Stat. 1376,
2056 (2010), codified at ECOA section 704B, 15 U.S.C. 1691c-2.
\2\ 15 U.S.C. 1691 et seq.
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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 CFPB to require any additional data that it
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 data; recordkeeping; publication of small business
lending data; and modifications or deletions of data prior to
publication in order to advance a privacy interest.
Section 1071 directs the CFPB 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 it to adopt exceptions to
any requirement or to exempt financial institutions from the
requirements of section 1071 as it deems necessary or appropriate to
carry out the purposes of section 1071. The CFPB is adding a new
subpart B to Regulation B to implement the requirements of section
1071. Key aspects of the CFPB's final rule are summarized below.
As envisioned by Congress, the small business lending rule will
create our nation's first consistent and comprehensive database
regarding lending to small businesses, including small farms. This will
fulfill section 1071's statutory purposes by allowing Federal, State,
and local enforcement agencies to assess potential areas for fair
lending enforcement and by enabling 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. The database, again as dictated by Congress, will not
reveal privacy-protected information about any particular small
business applicant, and small businesses will retain control over how
much of their demographic information they choose to divulge. In
addition, the CFPB believes that its final rule will help to sharpen
competition in credit supply by creating greater transparency around
small business lending.
Scope. The CFPB is requiring financial institutions to collect and
report data regarding applications for credit for small businesses,
including those that are owned by women and minorities. The CFPB is not
requiring financial institutions to collect and report data regarding
applications for women-owned and minority-owned businesses that are not
small. Because more than 99 percent of women-owned and minority-owned
businesses are small businesses, covering small businesses necessarily
means nearly all women-owned and minority-owned businesses will also be
covered. The CFPB 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, a ``financial institution'' is defined to include any
partnership, company, corporation, association (incorporated or
unincorporated), trust, estate, cooperative organization, or other
entity that engages in any financial activity. The rule thus applies to
a variety of entities that engage in small business lending, including
depository institutions (i.e., banks, savings associations, and credit
unions),\3\ online lenders, platform lenders, community development
financial institutions (both depository and nondepository
institutions), Farm Credit System lenders, lenders involved in
equipment and vehicle financing (captive financing companies and
independent financing companies), commercial finance companies,
governmental lending entities, and nonprofit nondepository lenders.\4\
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\3\ For purposes of this document, 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 document, unless otherwise specified.
\4\ The Bureau's rules, including this final 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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[[Page 35151]]
The rule uses the term ``covered financial institution'' to refer
to those financial institutions that are required to comply with its
data collection and reporting requirements. A covered financial
institution is defined as a financial institution that originated at
least 100 covered credit transactions (rather than 25, as proposed) for
small businesses in each of the two preceding calendar years. The CFPB
is not adopting an asset-based exemption threshold for depository
institutions, or any other general exemptions for particular categories
of financial institutions.
The final rule also permits creditors that are not covered
financial institutions to voluntarily collect and report small business
lending data in certain circumstances.
Covered credit transactions. Covered financial institutions are
required to collect and report data regarding covered applications from
small businesses for covered credit transactions. A ``covered credit
transaction'' is one that meets the definition of business credit under
existing Regulation B, with certain exceptions. Transactions within the
scope of the rule include loans, lines of credit, credit cards,
merchant cash advances, and credit products used for agricultural
purposes. The CFPB is excluding trade credit, public utilities credit,
securities credit, and incidental credit as proposed. In addition, the
CFPB has added exclusions for transactions that are reportable under
the Home Mortgage Disclosure Act of 1975 (HMDA) \5\ and insurance
premium financing. Consistent with the CFPB's proposal, factoring,
leases, and consumer-designated credit that is used for business or
agricultural purposes are also not covered credit transactions. In
addition, the CFPB has made clear that purchases of originated covered
credit transactions are not reportable.
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\5\ 12 U.S.C. 2801 et seq.
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Covered applications. A ``covered application''--which triggers
data collection, reporting, and related requirements when submitted by
a small business--is defined 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
definition of covered application is largely consistent with the
existing Regulation B definition of that term. However, certain
circumstances are not covered applications for purposes of this rule,
even if they are considered applications under existing Regulation B.
Specifically, covered applications for purposes of this rule do not
include (1) reevaluation, extension, or renewal requests on existing
business credit accounts, unless the request seeks additional credit
amounts; or (2) inquiries and prequalification requests.
Small business definition. A covered financial institution is
required to collect and report data on a covered application from a
``small business,'' which the rule defines in accordance with the
meaning of ``business concern or concern'' and ``small business
concern'' under the Small Business Act \6\ and Small Business
Administration (SBA) regulations. However, in lieu of using the SBA's
size standards for defining a small business concern, the definition in
this final rule looks to whether the business had $5 million or less in
gross annual revenue for its preceding fiscal year. The CFPB believes
that a straightforward $5 million threshold strikes the right balance
in terms of broadly covering the small business credit market to
fulfill section 1071's statutory purposes while meeting the SBA's
criteria for an alternative size standard.\7\ The final rule also
anticipates updates to this size standard, not more than every five
years, to account for inflation. The SBA Administrator has approved the
CFPB's use of this alternative size standard pursuant to the Small
Business Act.\8\
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\6\ 15 U.S.C. 631 et seq.
\7\ See 15 U.S.C. 632(a)(2)(C); 13 CFR 121.903.
\8\ See 15 U.S.C. 632(a)(2)(C).
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Data to be collected and reported. The rule addresses the data
points that must be collected and reported by covered financial
institutions for covered applications from small businesses. Congress
specifically enumerated many of these data points in ECOA section
704B(e)(2); for the others, the Congress granted the CFPB express
authority in 704B(e)(2)(H) to require financial institutions to compile
and maintain, along with enumerated data points, a record of ``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; other data points are based on
information within the financial institution's control. Covered
financial institutions must not discourage an applicant from responding
to requests for applicant-provided data and must otherwise maintain
procedures to collect such data at a time and in a manner that are
reasonably designed to obtain a response; when collecting data directly
from the applicant, the rule identifies certain minimum provisions that
must be included within financial institutions' procedures in order for
them to be considered ``reasonably designed.'' The rule also addresses
what financial institutions should do if, despite having such
procedures in place, they are unable to obtain certain data from an
applicant. Furthermore, the rule makes clear that a financial
institution may rely on information from the applicant, or appropriate
third-party sources, when compiling data. If the financial institution
verifies particular information, however, it must report that verified
information. Financial institutions are permitted to reuse previously
collected data in certain circumstances, rather than having to request
it from the applicant for each covered application.
As noted above, the rule includes 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: census tract based on
an address or location provided by the applicant; gross annual revenue
for the applicant's preceding full fiscal year; the 3-digit North
American Industry Classification System (NAICS) code for the applicant;
the number of workers that the applicant has; the applicant's time in
business; and the number of principal owners the applicant has.
There are also applicant-provided data points on the demographics
of the applicant's ownership: first, whether the applicant is a
minority-owned business or a women-owned business, along with a new
data field capturing whether the applicant is an LGBTQI+-owned
business; and second, the ethnicity, race, and sex of the applicant's
principal owners. The CFPB refers to these data points collectively as
an applicant's ``protected demographic information.'' Principal owners'
ethnicity and race will be collected from applicants using aggregate
categories as well as disaggregated subcategories. Principal owners'
sex/gender will be collected from applicants without using pre-defined
response categories.
The CFPB is not finalizing its proposed requirement to have
financial institutions collect race and ethnicity via visual
observation or surname if an in-person applicant does not provide any
ethnicity, race, or sex information for any principal owners; instead,
the final rule requires that these data be reported based only on
information provided by the applicant.
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The CFPB is providing lenders with a sample data collection form,
in both digital and paper form, to assist them in collecting protected
demographic data from applicants. Although the contents of the sample
form reflect certain legal requirements that financial institutions
must follow, their use of the sample form is not itself required under
the final rule. Rather, it is an available resource to financial
institutions.
In addition, the rule includes data points that will 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 (that is, the means by which the applicant submitted the
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 includes, 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 CFPB's rule implements a requirement in section 1071
that certain data collected from applicants be shielded from
underwriters and certain other persons (or, if a firewall is not
feasible, a notice is given instead); the CFPB refers to this as the
``firewall.''
Generally, an employee or officer of a financial institution or a
financial institution's affiliate that is involved in making any
determination concerning a covered application is prohibited from
accessing the applicant's responses to the inquiries about protected
demographic information that the financial institution makes pursuant
to the rule. This prohibition does not apply to an employee or officer,
however, if the financial institution determines that employee or
officer should have access to an applicant's responses to its inquiries
regarding the applicant's protected demographic information and the
financial institution provides a notice to the applicant regarding that
access. 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. The final rule does not require
specific language for this notice but does provide sample language that
a covered financial institution may use. The final rule also clarifies
several key points of the firewall provision.
Reporting data to the CFPB; publication of data by the CFPB and
other disclosures; and privacy considerations. Financial institutions
must collect small business lending data on a calendar year basis and
report it to the CFPB on or before June 1 of the following year.
Financial institutions reporting data to the CFPB are required to
provide certain identifying information about themselves as part of
their submission. The CFPB is releasing, concurrently with this final
rule, technical instructions for the submission of small business
lending data in a Filing Instructions Guide.\9\
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\9\ See CFPB, Small Business Lending Filing Instructions Guide,
<a href="https://www.consumerfinance.gov/data-research/small-business-lending/filing-instructions-guide/">https://www.consumerfinance.gov/data-research/small-business-lending/filing-instructions-guide/</a>.
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The CFPB will make available to the public, on an annual basis, the
application-level data submitted to it by financial institutions,
subject to modifications or deletions made by the CFPB, to advance
privacy interests. To ease burden on covered entities, CFPB publication
of application-level data will satisfy financial institutions'
statutory obligation to make data available to the public upon request.
At this time, the CFPB is not making a final decision on the best way
to protect privacy interests through pre-publication modification and
deletion of reported data. Assessing the many comments it received in
this area, the CFPB is preliminarily of the view that its privacy
assessment will focus primarily on whether (and, if so, how) small
business lending data, individually or in combination with other data,
pose re-identification risk for small businesses and, as a result, for
their owners. The CFPB also anticipates taking account of compelling
risks to financial institution privacy interests. The CFPB does not
anticipate that it can carry out the necessary analysis of pre-
publication modifications and deletions without at least one full year
of application-level data. The CFPB intends to further engage with
stakeholders on the issue of data publication before it resolves on a
particular approach to protecting privacy interests through
modifications and deletions. Finally, the CFPB anticipates publishing
select aggregate data--i.e., data that does not include application-
level information--before it publishes application-level data.
In addition, the final rule prohibits a financial institution or
third party from disclosing protected demographic information, except
in limited circumstances. Specifically, the final rule prohibits
financial institutions from disclosing or providing to third parties
the protected demographic information collected pursuant to the rule,
except to further compliance with ECOA or Regulation B or as required
by law. The final rule also limits third parties' disclosure of
protected demographic information.
Recordkeeping, enforcement, and severability. The rule addresses
issues related to recordkeeping, enforcement of violations, and
severability. The CFPB is also finalizing provisions regarding
treatment of bona fide errors under the rule in general along with
several safe harbors for particular kinds of errors. Relatedly, as
explained in part VII below, covered financial institutions will also
have a 12-month grace period during which the CFPB--for institutions
under its jurisdiction--will not assess penalties for errors in data
reporting, and will conduct examinations only to assist institutions in
diagnosing compliance weaknesses, to the extent that these institutions
engaged in good faith compliance efforts.
Effective and compliance dates, transitional provisions. This final
rule will become effective 90 days after publication in the Federal
Register. The CFPB is adopting a tiered compliance date schedule
because it believes that smaller and mid-sized lenders would have
particular difficulties complying within the single 18-month compliance
period proposed in the NPRM. Compliance with the rule beginning October
1, 2024 is required for financial institutions that originate the most
covered credit transactions for small businesses. However, institutions
with a moderate transaction volume have until April 1, 2025 to begin
complying with the rule, and those with the lowest volume have until
January 1, 2026. Covered financial institutions may begin collecting
applicants' protected demographic information one year prior to their
compliance date to help prepare for coming into compliance with this
final rule. The CFPB is also adopting a new provision to permit
financial institutions that do not have ready access to sufficient
information to determine their compliance tier (or whether they are
covered by the rule at all) to use reasonable methods to estimate their
volume of originations to small businesses for this purpose.
[[Page 35153]]
Compliance and technical assistance. The CFPB is supporting small
business lenders with a variety of compliance and technical tools to
help them determine if they are covered by this new rule, and if so
when their obligations arise. For lenders that are covered, the agency
is also making available a range of resources to assist with effective
implementation of the rule, including a small entity compliance guide.
These materials are available at <a href="https://www.consumerfinance.gov/compliance/compliance-resources/small-business-lending-resources/small-business-lending-collection-and-reporting-requirements">https://www.consumerfinance.gov/compliance/compliance-resources/small-business-lending-resources/small-business-lending-collection-and-reporting-requirements</a>. The CFPB is
also launching a dedicated regulatory and technical support program
that can provide oral and written assistance in response to stakeholder
questions about collection and reporting obligations, and a range of
technical resources to make it easier to report data to the CFPB. The
support program and related materials are available at <a href="https://www.consumerfinance.gov/data-research/small-business-lending-data/">https://www.consumerfinance.gov/data-research/small-business-lending-data/</a>. To
further assist covered financial institutions that serve small business
customers in their preferred languages, the CFPB will make the sample
data collection form available in several languages. The CFPB is also
planning to develop resources to help small businesses understand how
their data are treated, the availability of the dataset, and the
broader purposes of the rule.
Use of technology partners and industry consortia for accurate,
cost-efficient data collection and reporting. The final rule broadly
permits financial institutions to work with third parties, including
industry consortia, to develop services and technologies to aid in
collecting and reporting data. So long as they meet the obligations
stated in the rule, including collecting data in a manner that does not
discourage small businesses from providing it, financial institutions
are free to work with third parties to assist them with their
compliance obligations, whether that is with respect to data
collection, maintenance or reporting. The CFPB plans to work with
consortia or other entities seeking to assist financial institutions to
deploy industry-identified solutions. For example, the CFPB plans to
provide Application Programming Interfaces in an open-source
environment to assist financial institutions' technology partners to
develop accurate and efficient data reporting tools.
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 CFPB 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),\10\ and the Community
Development Financial Institutions (CDFI) Fund.\11\
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\10\ 12 U.S.C. 2901 et seq.
\11\ 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 will
provide much-needed transparency to the small business lending market.
The COVID-19 pandemic has shown that transparency is essential,
particularly at a time of crisis, when small businesses are in urgent
need of credit to recover from economic shocks.
In addition to informing policymaking, data collected under the
final rule can help creditors identify potentially profitable
opportunities to extend credit. As a result, small business owners
stand to benefit from increased credit availability. More transparency
will also allow small business owners to more easily compare credit
terms and evaluate credit alternatives, helping them to find the credit
product that best suits their needs at the best price. In these
different ways, the data will help stakeholders to enhance business and
community development, boosting broad-based economic activity and
growth. 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 otherwise facilitating the enforcement of
anti-discrimination laws.
Overview
Small businesses are a cornerstone of the U.S. economy. There were
over 33 million small businesses in the U.S. in 2019, employing almost
half of all private sector employees.\12\ Small businesses,
particularly start-ups, also generated 62 percent of new jobs since
1995.\13\ 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.\14\ Between 2007 and
2009, employment at businesses with under 50 employees fell by 10.4
percent, compared with 7.5 percent at larger firms,\15\ while between
2008 and 2011, lending to small firms fell by 18 percent, compared with
9 percent for all firms.\16\ Small businesses suffered again because of
the COVID-19 pandemic. Around 40 percent of small businesses were at
least temporarily closed in late March and early April 2020, due
primarily to demand shocks and employee health concerns.\17\ Across the
first year of the pandemic, some
[[Page 35154]]
200,000 more businesses exited the market relative to historic
levels.\18\ It took until July 2021 for non-farm private sector jobs at
establishments with fewer than 50 employees to recover to pre-pandemic
levels.\19\ As of mid-2022, small business loan approvals (other than
for government emergency programs) still remained below pre-pandemic
levels.\20\
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\12\ Off. of Advocacy, Small Bus. Admin., 2022 Small Business
Profile, at 2, 4 (Aug. 2022), <a href="https://cdn.advocacy.sba.gov/wp-content/uploads/2022/08/30121338/Small-Business-Economic-Profile-US.pdf">https://cdn.advocacy.sba.gov/wp-content/uploads/2022/08/30121338/Small-Business-Economic-Profile-US.pdf</a> (estimating 33.2 million small businesses in the United
States, accounting for 46.4 percent of employees) (2022 Small
Business Profile).
\13\ Off. of Advocacy, Small Bus. Admin., Frequently Asked
Questions About Small Business, at 1 (Dec. 2021), <a href="https://cdn.advocacy.sba.gov/wp-content/uploads/2021/12/06095731/Small-Business-FAQ-Revised-December-2021.pdf">https://cdn.advocacy.sba.gov/wp-content/uploads/2021/12/06095731/Small-Business-FAQ-Revised-December-2021.pdf</a> (SBA OA 2021 FAQs). See
generally Cong. Rsch. Serv., Small Business Administration and Job
Creation (updated Jan. 4, 2022), <a href="https://fas.org/sgp/crs/misc/R41523.pdf">https://fas.org/sgp/crs/misc/R41523.pdf</a> (discussing small business job creation); John
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).
\14\ Jason Dietrich et al., CFPB, 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).
\15\ Ay[scedil]eg[uuml]l [Scedil]ahin et al., Fed. Rsrv. Bank of
N.Y., 17 Current Issues in Econ. & Fin., Why Small Businesses Were
Hit Harder by the Recent Recession, at 1 (2011), <a href="https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci17-4.pdf">https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci17-4.pdf</a>.
\16\ Rebel A. Cole, Off. of Advocacy, Small Bus. Admin., How Did
the Financial Crisis Affect Small Business Lending in the United
States?, at 25-26 (Nov. 2012), <a href="https://www.microbiz.org/wp-content/uploads/2014/04/SBA-SmallBizLending-and-FiscalCrisis.pdf">https://www.microbiz.org/wp-content/uploads/2014/04/SBA-SmallBizLending-and-FiscalCrisis.pdf</a>.
\17\ 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>.
\18\ Leland D. Crane et al., Bd. of Governors of the Fed. Rsrv.
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. See also Ryan A. Decker & John Haltiwanger, Bd.
of Governors of the Fed. Rsrv. Sys., FEDS Notes, Business Entry and
Exit in the COVID-19 Pandemic: A Preliminary Look at Official Data
(May 6, 2022), <a href="https://www.federalreserve.gov/econres/notes/feds-notes/business-entry-and-exit-in-the-covid-19-pandemic-a-preliminary-look-at-official-data-20220506.html">https://www.federalreserve.gov/econres/notes/feds-notes/business-entry-and-exit-in-the-covid-19-pandemic-a-preliminary-look-at-official-data-20220506.html</a> (estimating excess
establishment exits to be roughly 181,000).
\19\ ADP Rsch. Inst., ADP National Employment Report, <a href="https://adpemploymentreport.com/">https://adpemploymentreport.com/</a> (last visited Mar. 20, 2023) (seasonally
adjusted non-farm private sector jobs at establishments with between
1-49 employees as of July 1, 2021 as compared to March 1, 2020).
\20\ 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/small-business-lending-index/april-2021">https://www.biz2credit.com/small-business-lending-index/april-2021</a>; Biz2Credit, Biz2Credit Small Business
Lending Index Finds Business Loan Approval Rates Rose at Small
Banks, dipped at Big Banks in July 2022 (July 2022), <a href="https://www.biz2credit.com/small-business-lending-index/july-2022">https://www.biz2credit.com/small-business-lending-index/july-2022</a> (approvals
as of July 2022).
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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 4,800 as of June
30, 2022 and the number of branches declined by 14 percent from 2009 to
2020.\21\ Meanwhile, new providers and products, such as online lenders
and merchant cash advances, have become increasingly prevalent in the
small business lending market. Financing by merchant cash advance
providers is estimated to have increased from $8.6 billion in volume in
2014 to $15.3 billion in 2017.\22\ From 2017 to 2019, the volume may
have increased further to $19 billion.\23\ Meanwhile, financing
provided by online ``fintech'' \24\ lenders is estimated to have
increased from $1.4 billion \25\ in outstanding balances in 2013 to
approximately $25 billion \26\ in 2019.
---------------------------------------------------------------------------
\21\ Cong. Rsch. 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> (decline since 1986); Fed. Deposit Ins. Corp.,
Quarterly Banking Profile, at 6 (Aug. 2022), <a href="https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/2022jun/qbp.pdf">https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/2022jun/qbp.pdf</a> (number of
banks as of June 30, 2022); Bruce C. Mitchell et al., Nat'l Cmty.
Reinvestment Coal., Relationships Matter: Small Business and Bank
Branch Locations (Mar. 2021), <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> (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 Glob. Mkt.
Intel., 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
merchant cash advance products. See part II.D below for discussion
of credit multiplier effects and for market size calculations for
merchant cash advance and other small business financing products in
2019.
\24\ ``Fintechs'' have been 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 institutions, such as commercial
finance companies and/or providers of specialized products,
including factoring and merchant cash advances. 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 Glob. Mkt. Intel.,
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 borrowers to outstanding balances using the
ratio methodology discussed in part II.D below.
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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 those that are
already underserved, to access credit and remain open--especially 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 than traditional
providers. Differences in funding models may also make non-traditional
credit providers less resilient than depository banks or credit unions
during shocks to the financial system such as the onset of the COVID-19
pandemic.\27\ Additionally, they may use complex algorithms and
artificial intelligence, which may create or heighten ``risks of
unlawful discrimination, unfair, deceptive, or abusive acts or
practices . . . or privacy concerns.'' \28\ Opaque product terms and
high costs can also trap business owners in cycles of debt. In terms of
opportunity, some newer approaches may help applicants 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 lower personal credit scores than male and white business owners
\29\--to access credit.\30\ Non-traditional credit providers as well as
digital offerings by traditional financial institutions may also help
offset decreases in lending
[[Page 35155]]
associated with the closure of bank branches.\31\
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\27\ Itzhak Ben-David et al., Nat'l Bureau of Econ. Res., Why
Did Small Business Fintech Lending Dry Up During March 2020, at 1-7
(Sept. 2021), <a href="https://www.nber.org/system/files/working_papers/w29205/w29205.pdf">https://www.nber.org/system/files/working_papers/w29205/w29205.pdf</a> (discussing how nondepository lenders faced a
credit crunch in March 2020 that impaired their ability to continue
funding small business borrowers despite increased demand due to the
COVID-19 shock).
\28\ 86 FR 16837, 16839 (Mar. 31, 2021); see also Rohit Chopra,
CFPB, Remarks of Director Rohit Chopra at a Joint DOJ, CFPB, and OCC
Press Conference on the Trustmark National Bank Enforcement Action
(Oct. 22, 2021), <a href="https://www.consumerfinance.gov/about-us/newsroom/remarks-of-director-rohit-chopra-at-a-joint-doj-cfpb-and-occ-press-conference-on-the-trustmark-national-bank-enforcement-action/">https://www.consumerfinance.gov/about-us/newsroom/remarks-of-director-rohit-chopra-at-a-joint-doj-cfpb-and-occ-press-conference-on-the-trustmark-national-bank-enforcement-action/</a>
(discussing risks of discriminatory bias from black box underwriting
algorithms).
\29\ Geng Li, Bd. of Governors of the Fed. Rsrv. 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).
\30\ See Jessica Battisto et al., Who Benefited from PPP Loans
by Fintech Lenders?, Liberty St. Econ. (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> (Who Benefited from PPP Loans)
(showing that online lenders were an important source of credit for
Black owners during the COVID-19 pandemic.
\31\ See Cong. Rsch. Serv., Fintech: Overview of Innovative
Financial Technology and Selected Policy Issues, at 1 (Apr. 28,
2020), <a href="https://crsreports.congress.gov/product/pdf/R/R46332">https://crsreports.congress.gov/product/pdf/R/R46332</a>.
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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 in
data reported to 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.\32\
---------------------------------------------------------------------------
\32\ 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), merchant cash
advance 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 that is not captured here by equipment and vehicle dealers
originating loans in their own names. Public lenders include SBA,
the Federal Housing Administration, Fannie Mae and Freddie Mac, and
the Farm Credit System, 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.
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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.\33\ Further, these datasets almost exclusively 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
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.
---------------------------------------------------------------------------
\33\ See part II.B below.
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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 CFPB's rule to implement section 1071 will provide: (A)
improved understanding of 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, minority-owned, and
LGBTQI+-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, women, and LGBTQI+ entrepreneurs.
The Small Business Act, as implemented by the Small Business
Administration (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 1,012 six-digit North American Industry Classification
System (NAICS) codes.\34\ 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. Employee-based size standards range from 100 employees
(used almost entirely in certain industries within the wholesale trade
sector) to 1,500 employees (used in industries across a variety of
sectors including, for example, petroleum refineries, automobile
manufacturing, and greeting card publishers).\35\ Size standards based
on average annual receipts are used in nearly all other industries, and
range from $2.25 million (used in several industries in the crop
production and animal production and aquaculture subsectors) to $47
million (used in industries across a variety of sectors including, for
example, passenger car leasing, television broadcasting, and general
medical and surgical hospitals).\36\
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\34\ See Small Bus. Admin., Table of Small Business Size
Standards Matched to North American Industry Classification System
Codes (effective Mar. 17, 2023), <a href="https://www.sba.gov/sites/default/files/2023-03/Table%20of%20Size%20Standards_Effective%20March%2017%2C%202023%20%281%29%20%281%29_0.pdf">https://www.sba.gov/sites/default/files/2023-03/Table%20of%20Size%20Standards_Effective%20March%2017%2C%202023%20%281%29%20%281%29_0.pdf</a>.
\35\ See id.
\36\ 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.
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Simpler definitions of what constitutes a small business are used
in certain contexts. For example, in certain annual research releases
the SBA Office of Advocacy defines a small business as one that has
fewer than 500 employees.\37\ According to the Office of Advocacy, and
based on this definition of a small business, in 2018 there were 32.5
million such businesses in the U.S. that represent 99.9 percent of all
U.S. firms and employ over 60 million Americans.\38\ Over six million
of these small businesses have paid employees, while 26.5 million are
non-employer businesses (i.e., the owner(s) are the only people
involved in the business).\39\ From 1995 to 2020, small businesses,
particularly young businesses and start-ups, created 12.7 million net
new jobs in the U.S., while large businesses created 7.9 million.\40\
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\37\ See SBA OA 2021 FAQs at 1.
\38\ See id.
\39\ See id.
\40\ 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).
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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 2019, minorities owned around 1.1
million employer firms in the U.S. (amounting to 18.7 percent of all
employer firms) \41\ and, as of 2018, approximately 8.7 million non-
employer firms (33.6 percent of all non-employer firms).\42\ Likewise,
as of 2019, women owned about 1.2 million employer firms (20.9 percent
of all employer firms) \43\ and, as of 2018, approximately 10.9 million
non-employer firms (41.0 percent of all non-employer firms).\44\
Additionally, in
[[Page 35156]]
2016 there were an estimated 1.4 million LGBTQI+ business owners in the
United States.\45\
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\41\ See Press Release, U.S. Census Bureau, Census Bureau
Releases New Data on Minority-Owned, Veteran-Owned and Women-Owned
Businesses (Oct. 28, 2021), <a href="https://www.census.gov/newsroom/press-releases/2021/characteristics-of-employer-businesses.html">https://www.census.gov/newsroom/press-releases/2021/characteristics-of-employer-businesses.html</a> (Census
Bureau 2021 Minority- and Women-Owned Businesses Data).
\42\ Minority Bus. Dev. Agency, U.S. Dep't of Com., All
Minority-Owned Firms: Fact Sheet (June 10, 2022), <a href="https://www.mbda.gov/sites/default/files/2022-06/All%20Minority%20Owned%20Firms%20Fact%20Sheet%20-%20FINAL%206.10.2022.pdf">https://www.mbda.gov/sites/default/files/2022-06/All%20Minority%20Owned%20Firms%20Fact%20Sheet%20-%20FINAL%206.10.2022.pdf</a> (stating that the nearly 8.7 million
minority non-employer firms in the U.S. generated $306.1 billion in
revenues in 2018).
\43\ See Census Bureau 2021 Minority- and Women-Owned Businesses
Data.
\44\ See Press Release, U.S. Census Bureau, Nonemployer
Statistics by Demographics (Dec. 16, 2021), <a href="https://www.census.gov/newsroom/press-releases/2021/nonemployer-statistics-by-demographics.html">https://www.census.gov/newsroom/press-releases/2021/nonemployer-statistics-by-demographics.html</a> (also stating that these firms collectively
generated $300 billion in annual receipts). In 2017, nearly half of
all women-owned non-employer firms generated less than $10,000 in
annual receipts, while only 0.05 percent generated $1 million or
more in receipts. 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>.
\45\ Nat'l Gay & Lesbian Chamber of Com., America's LGBT
Economy: The Premiere Report on the Impact of LGBT-Owned Businesses,
at 2 (Jan. 2017), <a href="https://nglcc.org/wp-content/uploads/2022/02/REPORT-NGLCC-Americas-LGBT-Economy-1-1.pdf">https://nglcc.org/wp-content/uploads/2022/02/REPORT-NGLCC-Americas-LGBT-Economy-1-1.pdf</a>.
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Businesses are legally structured in several ways. In 2018, 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--4.5 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 2018, most small employer
businesses were corporations, with 52.1 percent choosing to be S-
corporations and 15.3 percent preferring C-corporation status, although
sole proprietorship and partnership structures remained relatively
popular at 13.7 percent and 11.9 percent, respectively.\49\ By
contrast, in 2017, 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.\50\
---------------------------------------------------------------------------
\46\ See SBA OA 2021 FAQs at 3.
\47\ Id. at 4.
\48\ Id.
\49\ Id.
\50\ Off. of Advocacy, Small Bus. Admin., Frequently Asked
Questions About Small Business, at 4 (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).
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Small businesses are particularly important in specific sectors of
the economy. In 2019, in the services sector, small businesses supplied
9.2 million healthcare and social services jobs (44 percent of all
healthcare and social services jobs), 8.8 million accommodation and
food services jobs (61 percent), and 5.7 million construction jobs (81
percent).\51\ In the same year, in manufacturing, small businesses
supplied 5.1 million manufacturing jobs (42 percent of all
manufacturing jobs).\52\ Finally, in 2016, family farms with annual
gross sales under $500,000 totaled over 91 percent out of 2.2 million
farms,\53\ and small businesses provided over 137,000 agriculture,
forestry, fishing and hunting jobs (84 percent of all agriculture,
forestry, fishing and hunting jobs).\54\ 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.
---------------------------------------------------------------------------
\51\ See 2022 Small Business Profile at 4.
\52\ Id.
\53\ 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 Mar. 20,
2023) (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).
\54\ 2022 Small Business Profile at 4.
---------------------------------------------------------------------------
Small businesses were especially hard-hit by the onset of the
COVID-19 pandemic. At one point in the pandemic in April 2020, 20
percent of self-employed workers had temporarily exited the labor
market.\55\ 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 businesses (also declining by almost 50 percent among food
services and drinking establishments within the leisure and hospitality
industry), in which small businesses employ over 60 percent of
workers.\56\ Women-, minority-, and LGBTQI+-owned small businesses were
hit particularly hard. Between February and April 2020, some 373,000
jobs were lost in child daycare services, a sector in which women-
ownership predominates and minority-ownership is very significant. Only
54 percent of these jobs were recovered by the end of 2020.\57\ In
2021, 85 percent of LGBTQI+-owned small businesses reported the
pandemic was having a negative effect on their business, compared to 76
percent of non-LGBTQI+-owned small businesses.\58\ Since 2022, small
businesses have faced different economic shocks, including inflation
and a shortage of labor, as the economy reopened and resurgent consumer
demand has stretched still-fragile supply chains.\59\
---------------------------------------------------------------------------
\55\ Daniel Wilmoth, Off. of Advocacy, Small Bus. Admin., The
Effects of the COVID-19 Pandemic on Small Businesses (Issue Brief
No. 16), at 5 (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>.
\56\ Id. at 4. By the third quarter of 2020 many of these jobs
had since returned as mandatory closure orders ended and the economy
began to recover. Cf. Robert W. Fairlie et al., Nat'l Bureau of
Econ. Res., Were Small Businesses More Likely to Permanently Close
in the Pandemic, at 3, 14 (July 2022), <a href="https://www.nber.org/system/files/working_papers/w30285/w30285.pdf">https://www.nber.org/system/files/working_papers/w30285/w30285.pdf</a> (finding a sharp increase in
California business closures in the first and second quarters of
2020 that reversed in the third quarter of 2020). However, small
businesses still appear to have suffered more than large businesses.
See id. (finding that small businesses experienced substantially
higher closure rates than large businesses).
\57\ Bureau of Labor Stat., COVID-19 Ends Longest Employment
Recovery and Expansion in CES History, Causing Unprecedented Job
Losses in 2020 (June 2021), <a href="https://www.bls.gov/opub/mlr/2021/article/covid-19-ends-longest-employment-expansion-in-ces-history.htm">https://www.bls.gov/opub/mlr/2021/article/covid-19-ends-longest-employment-expansion-in-ces-history.htm</a>. An estimated 90 percent of childcare businesses are
women-owned and over half of these owners are minority women. Cindy
Larson & Bevin Parker-Cerkez, Investing in Child Care Fuels Women-
owned Businesses & Racial Equity, Loc. Initiatives Support Corp.
(Mar. 8, 2022), <a href="https://www.lisc.org/our-stories/story/investing-child-care-fuels-women-owned-businesses-racial-equity/">https://www.lisc.org/our-stories/story/investing-child-care-fuels-women-owned-businesses-racial-equity/</a>.
\58\ Spencer Watson et al., LGBTQ-Owned Small Businesses in
2021, Ctr. for LGBTQ Econ. Advancement & Rsch. And Movement
Advancement Project, at 9 (July 2022), <a href="https://www.lgbtmap.org/file/LGBTQ-Small-Businesses-in-2021.pdf">https://www.lgbtmap.org/file/LGBTQ-Small-Businesses-in-2021.pdf</a> (using data from the Federal
Reserve's Small Business Credit Survey, which began collecting
demographic data on LGBTQ small business ownership in 2021).
\59\ See William C. Dunkelberg & Holly Wade, Small Business
Economic Trends, Nat'l Fed'n of Indep. Bus., at 2, 11, 19 (Aug.
2022), <a href="https://assets.nfib.com/nfibcom/SBET-August-2022.pdf">https://assets.nfib.com/nfibcom/SBET-August-2022.pdf</a> (finding
that, out of 622 small businesses polled, 29 percent considered
inflation their biggest problem, 49 percent had at least one
unfilled job opening, and 32 percent reported that supply chain
disruptions had a significant impact on their business).
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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
CFPB 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 ethnicity, race, and sex of
small business owners, applications as opposed to originations, and for
small business financing products that are not currently reported in
Call Report data.\60\
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\60\ CFPB, 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).
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Data on small business lending are fragmented, incomplete, and not
standardized, making it difficult to
[[Page 35157]]
conduct meaningful comparisons across products and over time. Against
this background, it is not hard to see why Congress believed that the
collection of small business application data would serve to identify
business and community development needs and opportunities. The lack of
data 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.\61\ 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 nondepository lenders.\62\
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.\63\
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\61\ 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.
\62\ 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., Quarterly Banking
Profile, <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 Mar. 20,
2023).
\63\ White Paper at 40.
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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 Community Reinvestment Act (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).\64\ The CRA currently 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.\65\ 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.\66\ There are no similar sources of information about lending to
small businesses by nondepository institutions. The SBA also releases
loan-level data concerning some of its loan programs, but these
typically do not include demographic information, and cover only a
small portion of the overall small business financing market.
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\64\ See Fed. Fin. Insts. Examination Council, Reporting Forms
31, 41, and 51 (last updated Mar. 16, 2023), <a href="https://www.ffiec.gov/ffiec_report_forms.htm">https://www.ffiec.gov/ffiec_report_forms.htm</a> (FFIEC Call Report).
\65\ 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 currently 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 currently
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. The Federal agencies responsible
for implementing the CRA have proposed to amend the CRA regulations
to adopt the Bureau's definition of small business. 87 FR 33884
(June 3, 2022).
\66\ See Nat'l Credit Union Admin., Call Report Form 5300
Instructions, at 74-84 (Mar. 31, 2022), <a href="https://www.ncua.gov/files/publications/regulations/call-report-instructions-march-2022.pdf">https://www.ncua.gov/files/publications/regulations/call-report-instructions-march-2022.pdf</a>
(Call Report Form 5300 Instructions).
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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 market, and
lack standardization across different agencies.
First, these datasets exclude entire categories of lenders. For
example, banks under $1.384 billion in assets, as of 2022, do not have
to report under the CRA.\67\ The FFIEC and NCUA Call Reports and CRA
data do not include lending by nondepository financial institutions,
which the CFPB estimates to represent 37 percent of the small business
financing market and is rapidly growing.\68\
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\67\ Joint Press Release, Bd. of Governors of the Fed. Rsrv.
Sys. & Fed. Deposit Ins. Corp., Agencies Release Annual Asset-Size
Thresholds Under Community Reinvestment Act Regulations (Dec. 16,
2021), <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20211216a.htm">https://www.federalreserve.gov/newsevents/pressreleases/bcreg20211216a.htm</a>.
\68\ Nondepository lending is estimated to total approximately
$550 billion out of $1.5 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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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 ethnicity,
race, and sex 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 FFIEC Call Report and CRA data separately
identify loans of under $1 million in value and, among loans of under
$1 million in value, CRA data also identify loans to businesses with
annual revenues of $1 million or less (if the lender collects borrower
revenue information).\69\ 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 on the NCUA
Call Report,\70\ potentially excluding from measurement an important
source of funding for many small businesses, particularly the smallest
and often most underserved.
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\69\ Fed. Fin. Insts. Examination Council, Schedule RC-C, Part
II Loans to Small Businesses and Farms (2017), 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).
\70\ Call Report Form 5300 Instructions at 44.
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Finally, the Federal sources of small business lending data are not
[[Page 35158]]
standardized across agencies and cannot be easily compared. For
example, as noted above, 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 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.\71\
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\71\ 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 Paycheck Protection Program loan recipients did not
report their ethnicity and 58 percent did not reveal their gender);
see also Rachel Atkins et al., Discrimination in Lending? Evidence
from the Paycheck Protection Program, 58 Small Bus. Econ. 843, 844
(Feb. 2022), <a href="https://link.springer.com/article/10.1007/s11187-021-00533-1">https://link.springer.com/article/10.1007/s11187-021-00533-1</a> (finding that borrower business owner race was reported for
only 10 percent of Paycheck Protection Program loans).
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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, sample sizes, 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,\72\ small
business employment,\73\ rates of small business credit application
approvals,\74\ and small business lending and delinquency levels.\75\
Other databases have more granularity and provide detailed information
on individual businesses, including revenue, credit utilization,
industry, and location.\76\
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\72\ Nat'l Fed'n of Indep. Bus., Small Business Optimism Index
(July 2022), <a href="https://www.nfib.com/surveys/small-business-economic-trends/">https://www.nfib.com/surveys/small-business-economic-trends/</a>.
\73\ ADP Rsch. Inst., Employment Reports, <a href="https://adpemploymentreport.com/">https://adpemploymentreport.com/</a> (last visited Mar. 20, 2023).
\74\ 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 Mar. 20, 2023).
\75\ PayNet, Small Business Lending Index, <a href="https://sbinsights.paynetonline.com/lending-activity/">https://sbinsights.paynetonline.com/lending-activity/</a> (last visited Mar. 20,
2023).
\76\ 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/product/business-credit-reports-small-business/">https://www.equifax.com/business/product/business-credit-reports-small-business/</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 self-
reporting or 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 as
well as have restrictions on their use, raising equity issues for
stakeholders who cannot afford access or are not permitted to use the
data for their desired purposes.
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. A study by a small business trade group
found a correlation between small business owners' ability to access
credit and their ability to hire.\77\ 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.\78\
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\77\ White Paper at 17.
\78\ 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 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 households and women-
led households, which on average have less wealth than white households
and male-led households.\79\
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\79\ 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. Rsrv.
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).
---------------------------------------------------------------------------
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 some entrepreneurs may not wish to do. For small
businesses, equity funding also tends to be somewhat more expensive
than debt financing in the long run. This is for a number of reasons,
including that loan interest payments, unlike capital gains, are tax-
deductible.\80\ Finally, equity investments from others besides family
and friends are available to only a small fraction of small businesses.
---------------------------------------------------------------------------
\80\ 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>.
---------------------------------------------------------------------------
Many small businesses instead seek debt financing from a wide range
of
[[Page 35159]]
providers. These providers include depository institutions, such as
banks, savings associations, and credit unions,\81\ as well as online
lenders and commercial finance companies, specialized providers of
specific financing products, nonprofits, and a range of government and
government-sponsored enterprises, among others.
---------------------------------------------------------------------------
\81\ For purposes of this document, 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 document, unless otherwise specified,
to facilitate analysis and discussion.
---------------------------------------------------------------------------
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.\82\ As noted earlier, the number of banks has declined
significantly since a post-Great Depression peak in 1986 of over 18,000
institutions to under 4,800 institutions as of June 30, 2022,\83\ while
13,500 branches closed from 2009 to mid-2020, representing a 14 percent
decrease.\84\ 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.\85\ 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.\86\ 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,\87\ raising concerns about equal access to credit.
---------------------------------------------------------------------------
\82\ 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 Mar. 20, 2023).
\83\ Cong. Rsch. 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> (decline since 1986); Fed. Deposit Ins. Corp.,
Quarterly Banking Profile, at 7 (Aug. 2022), <a href="https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/2022jun/qbp.pdf">https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/2022jun/qbp.pdf</a> (number of
banks as of June 30, 2022).
\84\ 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).
\85\ Bd. of Governors of the Fed. Rsrv. 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>.
\86\ Id.
\87\ Id.
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As banks have merged and the number of branches reduced, the share
of banking assets has also become increasingly concentrated in the
largest institutions, with banks of over $10 billion in assets
representing 86 percent of all industry assets in 2021, totaling $20.3
trillion out of $23.7 trillion.\88\ 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.\89\ 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.\90\ Since institutions
under $1.384 billion in assets currently are not required to report on
lending under the CRA,\91\ it is difficult to precisely quantify the
negative impact of bank consolidation and shuttered branches on small
business lending and access to credit in local areas.\92\
Qualitatively, community banks typically receive high satisfaction
scores among small business borrowers, reflecting their greater
commitment to relationship banking, a model of banking ``used to serve
families, businesses, and communities as individuals, with an emphasis
on providing customized help, rather than assembly line service.'' \93\
---------------------------------------------------------------------------
\88\ 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 Mar. 20, 2023); see
also Cong. Rsch. 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> (stating that banks over $10 billion held 84 percent of
all industry assets in 2018).
\89\ 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.'' Cong. Rsch. 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).
\90\ 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 Mar. 20, 2023). 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 Mar. 20,
2023) (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).
\91\ See part II.B above.
\92\ Bruce C. Mitchell et al., Nat'l Cmty. Reinvestment Coal.,
Relationships Matter: Small Business and Bank Branch Locations (Mar.
2021), <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>.
\93\ Rohit Chopra, CFPB, Prepared Remarks of CFPB Director Rohit
Chopra in Great Falls, Montana on Relationship Banking and Customer
Service (June 14, 2022), <a href="https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-of-cfpb-director-rohit-chopra-in-great-falls-montana-on-relationship-banking-and-customer-service/">https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-of-cfpb-director-rohit-chopra-in-great-falls-montana-on-relationship-banking-and-customer-service/</a>; see
also 87 FR 36828, 36829 (June 21, 2022) (stating that relationship
banking is ``an aspirational model of banking that meets its
customers' needs through strong customer service, responsiveness,
and care''); Cong. Rsch. Serv., Over the Line: Asset Thresholds in
Bank Regulation, at 3 (May 3, 2021), <a href="https://fas.org/sgp/crs/misc/R46779.pdf">https://fas.org/sgp/crs/misc/R46779.pdf</a> (stating that community banks are more likely to engage
in relationship-based lending).
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In contrast to banks, credit unions increased their small business
lending from $30 billion in 2008 to $71 billion in 2021.\94\ Like
community banks, credit
[[Page 35160]]
unions typically receive high satisfaction scores among small business
borrowers, reflecting more high-contact, relationship-based lending
models.\95\
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\94\ 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 51 (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> ($30 billion in lending in 2008); Calculated
from NCUA Call Report data accessed on October 18, 2022 ($71 billion
in lending in 2021). 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.
\95\ Fed. Rsrv. Banks, Small Business Credit Survey, 2021 Report
On Employer Firms, at 28 (2021), <a href="https://www.fedsmallbusiness.org/survey/2021/report-on-employer-firms">https://www.fedsmallbusiness.org/survey/2021/report-on-employer-firms</a>.
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Certain banks and credit unions choose to be mission-based lenders,
as CDFIs or minority depository institutions.\96\ 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
almost 1,400 CDFIs (over half of which are depository institutions) as
of August 2022 and over 140 minority depository institutions as of
March 2022.\97\
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\96\ Minority depository institutions are depository
institutions that are majority-owned by socially and economically
disadvantaged individuals or that have a majority-minority board of
directors and serve a predominantly minority community. Fed. Deposit
Ins. Corp., Minority Depository Institutions: Structure,
Performance, and Social Impact, at 1 (2019), <a href="https://www.fdic.gov/regulations/resources/minority/2019-mdi-study/full.pdf">https://www.fdic.gov/regulations/resources/minority/2019-mdi-study/full.pdf</a>. Minority
depository institutions focus more than other banks on minority and
low- and moderate-income communities. See id. at 1, 5. CDFI banks
are certified through the U.S. Department of the Treasury by
demonstrating they serve low-income communities. CDFI Fund, CDFI
Certification, <a href="https://www.cdfifund.gov/programs-training/certification/cdfi">https://www.cdfifund.gov/programs-training/certification/cdfi</a> (last visited Mar. 17, 2023).
\97\ CDFI Fund., CDFI Certification, <a href="https://www.cdfifund.gov/programs-training/certification/cdfi">https://www.cdfifund.gov/programs-training/certification/cdfi</a> (last visited Mar. 20, 2023);
Fed. Deposit Ins. Corp., Minority Depository Institutions Program
(last visited Mar. 20, 2023), <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 depository institutions have been
providing relatively less funding to small businesses,\98\ some small
businesses have increasingly relied on nondepository institutions for
financing. Since nondepositories typically do not report their small
business financing activities to regulators, there are no authoritative
sources for either the number of such entities or the dollar value of
financing they provide to small businesses.\99\ However, what data are
available make clear that nondepository online lenders are increasing
their share of the small business financing market.\100\
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\98\ 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 Mar. 20,
2023) (tabulating outstanding balances for credit extended to small-
and non-small business lending by banks and thrifts over time).
\99\ See part II.B above.
\100\ See part II.D below.
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Whether depository or nondepository, each provider of small
business financing may assess 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,
Federal Housing Administration, and USDA--guarantee or insure loans 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.\101\ 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. Online lenders increasingly use complex algorithms,
automation, and even artificial intelligence to assess risk and make
underwriting decisions, with originations typically being less
relationship-based in nature.
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\101\ Cong. Rsch. Serv., Small Business Administration 7(a) Loan
Guaranty Program (updated June 30, 2022), <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 Mar. 20, 2023) (listing Federal Housing
Administration 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. 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 merchant cash advances
apply a multiple to the value of the up-front payment.\102\ Moreover,
providers may add additional fees that are not standardized within
industries, much less across them.
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\102\ See part II.D below for definitions of the different
product categories.
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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 part, the CFPB describes its estimates of the total outstanding
balances of credit in the market, the number of institutions that are
active in the small business financing market, and how the CFPB arrived
at these estimates. Where possible, the CFPB 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 the year prior to the
onset of 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 CFPB 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.\103\ 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.\104\
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\103\ 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 Mar. 20, 2023).
\104\ 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
merchant cash advances, 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 merchant cash advances
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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[[Page 35161]]
As detailed in this section, the CFPB estimates that the market for
small business financing products totaled $1.4 trillion in outstanding
balances in 2019. The CFPB 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. However, by July 2022, over $740 billion in Paycheck
Protection Program loans had been forgiven, bringing the total market
size back below $1.7 trillion.\105\ Below, the CFPB estimates the
market share for different small business financing products.
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\105\ Pandemic Response Accountability Comm., Paycheck
Protection Program: Loan Forgiveness by the Numbers (July 2022),
<a href="https://www.pandemicoversight.gov/media/file/ppp-loan-forgiveness-fact-sheet-july-2022-updatepdf">https://www.pandemicoversight.gov/media/file/ppp-loan-forgiveness-fact-sheet-july-2022-updatepdf</a>.
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Since the available data regarding depository institutions' small
loans to businesses address term loans, lines of credit, and credit
cards together, the respective shares of these three products in the
overall small business financing market are difficult to assess. As
detailed in this part, the CFPB 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. As of July 2022, outstanding balances for Economic
Impact Disaster Loan Program and Paycheck Protection Program loans
totaled $260 billion, bringing the total value of all outstanding loans
and lines of credit to around $1 trillion.\106\
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\106\ Id.
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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 CFPB
estimates that banks and savings associations accounted for a total of
about $721 billion in outstanding credit to small businesses and small
farms as of December 2019.\107\ Using NCUA Call Report data for
December 2019, the CFPB estimates that credit unions accounted for a
total of about $55 billion in outstanding credit to members for
commercial purposes.\108\ From this value, the CFPB 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 CFPB
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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\107\ Calculated from FFIEC Call Report data accessed on October
18, 2022. The CFPB 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 CFPB 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 rule take out loans
that are larger than $1 million or $500,000, for businesses and
farms, respectively.
\108\ Calculated from NCUA Call Report data accessed on October
18, 2022.
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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, online lenders, and
nondepository CDFIs.\109\
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\109\ There may additionally be lending that is not captured
here by equipment and vehicle dealers originating loans in their own
names.
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Commercial finance companies specialize in financing equipment and
vehicle purchases. The CFPB estimates that the value of outstanding
balances on credit extended by commercial finance companies totaled
approximately $160 billion. Using data from the Board's Finance Company
Business Receivables data on owned assets as of December 2019, the CFPB
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.\110\ The CFPB further assumes that about 75 percent of
this value, or $162 billion, can be attributed to loans to small
businesses.\111\
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\110\ Bd. of Governors of the Fed. Rsrv. Sys., Finance
Companies--G.20 (updated Aug. 17, 2022), <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.
\111\ 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 financial services exclusively in an online environment.\112\
The CFPB estimates that total outstanding loan balances for such
providers reached around $25 billion in 2019. Using this estimate, the
CFPB scales up an estimated $9.3 billion in credit originations by
online platform lenders to small and medium enterprises in 2019 to $25
billion in estimated outstanding balances, under the assumptions
discussed above.\113\ At the beginning of the COVID-19 pandemic and
associated financial crisis, these lenders originated around $22
billion in Paycheck Protection Program loans to small businesses from
March to August 2020 \114\ and likely continued to originate billions
more during the third wave of Paycheck Protection Program loans in
2021, which represents an almost 90 percent increase or more in
outstanding balances since 2019.\115\ This follows already rapid growth
from $1.4 billion in estimated outstanding balances in 2013.\116\
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\112\ Barkley & Schweitzer, 17 Int'l J. Cent. Banking at 35-36.
\113\ See 2018 US Fintech Market Report at 6. The Bureau notes
that this figure may underestimate the total value of such 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 merchant cash advance 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.
\114\ 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>.
\115\ Per the program's intent, many Paycheck Protection Program
loans have been forgiven since the program began, which likely means
that outstanding balances on Paycheck Protection Program loans
extended by online lenders have since declined. See Pandemic
Response Accountability Comm., Paycheck Protection Program: Loan
Forgiveness by the Numbers (July 2022), <a href="https://www.pandemicoversight.gov/media/file/ppp-loan-forgiveness-fact-sheet-july-2022-updatepdf">https://www.pandemicoversight.gov/media/file/ppp-loan-forgiveness-fact-sheet-july-2022-updatepdf</a> (reporting that $742 billion in Paycheck
Protection Program loans had been forgiven by July 2022).
\116\ 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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[[Page 35162]]
The CFPB 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
CFPB 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.\117\
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\117\ 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 CFPB estimates outstanding balances for
loans on 5+ unit residential dwellings to total over $30 billion.\118\
The CFPB 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.\119\
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\118\ 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.
\119\ 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 Federal
Housing Administration, 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 extended disproportionately smaller
dollar value loans on average. There is also a substantial market
for commercial real estate besides 5+ unit residential dwellings not
captured here due to a lack of data on loans of small size or to
small businesses. See Mortg. Bankers' Ass'n, MBA: Commercial,
Multifamily Mortgage Bankers Originated $683B in 2021; Total Lending
Tally Reaches $891B (Apr. 15, 2022), <a href="https://newslink.mba.org/mba-newslinks/2022/april/mba-newslink-friday-apr-15-2022/mba-commercial-multifamily-mortgage-bankers-originated-683b-in-2021-total-lending-tally-reaches-891b/">https://newslink.mba.org/mba-newslinks/2022/april/mba-newslink-friday-apr-15-2022/mba-commercial-multifamily-mortgage-bankers-originated-683b-in-2021-total-lending-tally-reaches-891b/</a> (estimating the volume of commercial real estate
lending of any size to be $890.6 billion in 2021, of which
multifamily lending accounted for $376 billion).
---------------------------------------------------------------------------
Also categorized separately from depository institution totals so
as to distinguish private from government and government-sponsored
loans, the CFPB estimates that outstanding balances for loans extended
by the SBA and the Farm Credit System totaled around $200 billion in
2019.\120\
---------------------------------------------------------------------------
\120\ 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 Federal Housing Administration, which are separately
recorded within the 5+ unit residential dwelling loan product
category.
---------------------------------------------------------------------------
The SBA, through its traditional 7(a), 504, and microloan programs
as well as the Economic Impact Disaster Loan Program and funding for
Small Business Investment Companies, is the largest governmental lender
by value, with $143.5 billion in outstanding balances at the end of
fiscal 2019.\121\ As part of the Federal government's response to the
COVID-19 pandemic, during 2020 and 2021 SBA lending increased in size
by over $1 trillion due to the Paycheck Protection Program, which
totaled almost $800 billion, and the Economic Impact Disaster Loan
Program, which totaled $210 billion.\122\ However, as noted above, over
$740 billion in Paycheck Protection Program loans had been forgiven as
of July 2022, bringing SBA outstanding loan balances back down.\123\
---------------------------------------------------------------------------
\121\ Small Bus. Admin., Small Business Administration Loan
Program Performance (effective Mar. 31, 2022), <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.
\122\ 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>.
\123\ Pandemic Response Accountability Comm., Paycheck
Protection Program: Loan Forgiveness by the Numbers (July 2022),
<a href="https://www.pandemicoversight.gov/media/file/ppp-loan-forgiveness-fact-sheet-july-2022-updatepdf">https://www.pandemicoversight.gov/media/file/ppp-loan-forgiveness-fact-sheet-july-2022-updatepdf</a>.
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The Farm Credit System is another important government-related part
of the small business credit landscape. The CFPB estimates that Farm
Credit System lenders 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 CFPB 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 CFPB estimates that outstanding balances of
such small credit to farms totaled $55 billion at the end of 2019.\124\
The CFPB 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. Considering credit extended with
an origination value of between $500,000 and $5 million would increase
the market size by $86 billion to $141 billion.\125\
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\124\ Fed. Farm Credit Banks Funding Corp., Farm Credit 2019
Annual Information Statement of the Farm Credit System, at 54 (Feb.
28, 2020), <a href="https://www.farmcreditfunding.com/ffcb_live/investorResources/informationStatements.html">https://www.farmcreditfunding.com/ffcb_live/investorResources/informationStatements.html</a>.
\125\ Id.
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Mostly extended by depository institutions, the CFPB estimates that
the market for small business credit cards totaled over $60 billion in
outstanding balances for 2020.\126\ Using data from Y-14 Form
submissions to the Federal Reserve Board, the CFPB estimates the value
of outstanding balances for small business credit card accounts where
the loan is underwritten with the sole proprietor or primary business
owner as an applicant.\127\
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\126\ See Bd. of Governors of the Fed. Rsrv. Sys., Report Forms
FR Y-14M, <a href="https://www.federalreserve.gov/apps/reportingforms/Report/Index/FR_Y-14M">https://www.federalreserve.gov/apps/reportingforms/Report/Index/FR_Y-14M</a> (last updated Sept. 12, 2022). 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 CFPB, 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>.
\127\ 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. The CFPB estimates the total size of the equipment and vehicle
leasing market for all sized businesses in 2019 to be approximately
$900 billion.\128\ The CFPB further assumes that small businesses
comprise around 18 percent of the total
[[Page 35163]]
equipment and vehicle leasing market.\129\
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\128\ 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).
\129\ 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 (Oct. 21, 2014),
<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> ($903 billion market in 2014,
commensurate with an 18 percent market share for small business
borrowers at the time of the Karen Mills report).
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Factoring is a similarly significant product type, estimated at
around $100 billion in market size for 2019.\130\ 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 in full; hence, a factor's risk related
to repayment lies with the business's customer and not the business
itself. In most cases, specific companies, called factors, provide
factoring products.
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\130\ 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 CFPB assumes that most factoring is provided
to small business customers.
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The market for merchant cash advances continues to develop 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 merchant cash advance market's size. The CFPB estimates the 2019
market size to be around $20 billion.\131\ The merchant cash advance
market is also of particular significance for smaller and traditionally
underserved businesses that may not qualify for other types of
credit.\132\ Merchant cash advances 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,
merchant cash advances typically purport to be for short
durations.\133\ The CFPB understands that merchant cash advances also
tend to be relatively high-cost products.\134\ Several States,
including New York and California, are implementing laws that will
require providers of ``sales-based financing,'' such as merchant cash
advances, as well as other nondepositories to provide disclosures
(including estimated APR in some States) similar to those required
under the Truth in Lending Act (TILA),\135\ which generally only
applies to consumer credit.\136\
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\131\ 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 Glob. Mkt. Intel., 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 CFPB assumes in this paper a 1:1 ratio between annual
origination volumes and outstanding balances for merchant cash
advance products. See above for discussion of credit multiplier
effects.
\132\ Cf. Barbara Lipman & Ann Marie Wiersch, Bd. of Governors
of the Fed. Rsrv. 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 merchant cash
advance products, position themselves as offering financing to
borrowers underserved by traditional lenders).
\133\ See id. (stating that merchant cash advances are generally
repaid in three to 18 months).
\134\ Id. (stating that annual percentage rates on merchant cash
advance 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/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> (observing
stakeholder concern about the high-cost of merchant cash advances
that can reach triple digit annual percentage rates).
\135\ 15 U.S.C. 1601 et seq.
\136\ New York State law requires that providers of ``sales-
based financing'' provide disclosures to borrowers that include
calculations of an estimated annual percentage rate in accordance
with the CFPB's Regulation Z, 12 CFR part 1026. See N.Y. 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>. The New York
Department of Financial Services is currently developing regulations
to implement the law. See N.Y. Dep't of Fin. Servs., Proposed
Financial Services Regulations, <a href="https://www.dfs.ny.gov/industry_guidance/regulations/proposed_fsl">https://www.dfs.ny.gov/industry_guidance/regulations/proposed_fsl</a>. Similarly, California's
Department of Financial Protection and Innovation has adopted
regulations to implement a California law requiring disclosures by
commercial financing companies, including those providing sales-
based financing. See 10 Cal. Code Reg. 900(a)(28) (effective Dec. 9,
2022) (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. 914 and 940 (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>.
Other States, including Virginia and Utah, have passed commercial
financing disclosure laws that do not require disclosure of the APR.
See Virginia H. 1027 (enacted Apr. 11, 2022), <a href="https://lis.virginia.gov/cgi-bin/legp604.exe?221+ful+CHAP0516">https://lis.virginia.gov/cgi-bin/legp604.exe?221+ful+CHAP0516</a>; Utah S.B. 183
(enacted Mar. 24, 2022), https://le.utah.gov/~2022/bills/static/
SB0183.html.
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Finally, trade credit is another significant market, which the
Bureau estimates to total $51 billion in outstanding balances in 2019.
The Bureau estimates the trade credit market size by adding the total
accounts payable for businesses under $1 million in annual
revenue.\137\ Considering the total value of accounts payable for
businesses between $1 million and $5 million would increase the market
size by $88 billion.\138\ 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 services
without requiring immediate payment.
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\137\ 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).
\138\ 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 CFPB 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 CFPB estimates that there were approximately 8,200 financial
institutions extending small business financing in 2019, almost 80
percent of which were depository institutions.\139\
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\139\ This number has increased from 8,100 financial
institutions estimated in the NPRM for two reasons related to the
number of nondepository financial institutions participating in the
credit market for 5+ unit residential dwellings in 2019. First, the
CFPB revised its methodology for excluding depository institutions
from the total number of participants active in the credit market
for 5+ unit residential dwellings, as detailed below. Second, the
NPRM total for all financial institutions active in the small
business financing market included only those nondepository
financial institutions participating in the credit market for 5+
unit residential dwellings estimated to be covered by the proposed
rule rather than all those active in the market at all.
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[[Page 35164]]
Based on FFIEC Call Report data for December 2019, the CFPB
estimates that about 5,100 banks and savings associations were active
in the small business lending market, out of a total of about 5,200
banks and savings associations.\140\ The CFPB 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.
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\140\ Calculated from FFIEC Call Report data accessed on October
18, 2022. Although 2019 figures are used here for consistency across
types of lenders, consolidation among depository institutions has
continued since 2019. As of June 30, 2022, 4,692 commercial banks or
savings associations and 1,575 credit unions reported a positive
outstanding balance of small loans, lines of credit, and credit
cards to businesses. Calculated from FFIEC Call Report data accessed
on October 14, 2022.
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Based on the NCUA Call Report data for December 2019, the CFPB
estimates that about 1,200 out of 5,300 total credit unions were active
in the small business lending market.\141\ The CFPB 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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\141\ 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 updated Mar. 8, 2023). (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.) Although 2019
figures are used here for consistency across types of lenders,
consolidation among depository institutions has continued since
2019. As of June 30, 2022, 1,120 credit unions reported a positive
number of originations of loans, lines of credit, and credit cards
to members for commercial purposes during the first half of 2022.
This number was calculated from NCUA Call Report data accessed on
October 14, 2022.
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The CFPB estimates that there were about 1,900 nondepository
institutions active in the small business financing market in
2019,\142\ accounting for around $550 billion in outstanding credit to
small businesses. This total number of nondepository institutions
includes approximately 300 commercial finance companies, 30 or more
online lenders, 340 nondepository CDFIs, 150 nondepository mortgage
lenders in the multifamily market, 100 merchant cash advance providers,
700-900 factors, at least 100 government lenders, and 72 Farm Credit
System institutions.
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\142\ 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 CFPB 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-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. This number has
increased from 1,800 financial institutions estimated in the NPRM
for two reasons related to the number of nondepository financial
institutions participating in the credit market for 5+ unit
residential dwellings in 2019. First, the CFPB revised its
methodology for excluding depository institutions from the total
number of participants active in the credit market for 5+ unit
residential dwellings, as detailed below. Second, the Notice of
Proposed Rulemaking total for all nondepository financial
institutions active in the small business financing market included
only those nondepository financial institutions participating in the
credit market for 5+ unit residential dwellings that were estimated
to be covered by the proposed rule rather than all those active in
the market at all.
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The Bureau estimates that about 300 commercial finance companies
were engaged in small business lending in 2019.\143\ The Bureau also
estimates there to be about 30 or more online lenders that were active
in the small business lending market in 2019, not including merchant
cash advance providers.\144\
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\143\ See id. 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. 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.
\144\ Id. Using the same methodology as for commercial finance
companies, Gopal and Schnabl identified 19 fintech companies. The
CFPB conservatively increases this estimate to 30 to account for
rapid growth in the industry from 2016 to 2019. 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).
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The Bureau estimates that 340 nondepository CDFIs were engaged in
small business lending in 2019. 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.\145\ Of these, 340 institutions reported that business finance or
commercial real estate finance were a primary or secondary line of
business in 2019.\146\
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\145\ 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>.
\146\ Id. at 15-16.
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The Bureau estimates that about 150 nondepository mortgage lenders
participated in the credit market for 5+ unit residential dwellings in
2019.\147\ 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.\148\ 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 two loans in 2019.\149\
---------------------------------------------------------------------------
\147\ Nondepository lenders providing financing for commercial
real estate transactions besides 5+ unit residential dwellings are
not separately captured here but often overlap with those lenders
providing financing for 5+ unit residential dwellings. See Com.
Prop. Exec., Top 20 Commercial Mortgage Banking and Brokerage Firms
of 2022 (Jan. 3, 2022), <a href="https://www.commercialsearch.com/news/top-20-commercial-mortgage-banking-and-brokerage-firms-of-2022/">https://www.commercialsearch.com/news/top-20-commercial-mortgage-banking-and-brokerage-firms-of-2022/</a> (listing
top commercial real estate lenders and identifying sectors financed
by lender).
\148\ 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>.
In the Notice of Proposed Rulemaking, the CFPB had estimated
nondepository financial institutions participating in the credit
market for 5+ unit residential dwellings by excluding financial
institutions included in the above-cited report with the word
``bank'' or ``credit union'' in the institution name and further
manually removing around ten more institutions that appeared to be
depository institutions at first glance. To improve accuracy, for
the Final Rule the CFPB has manually coded all 2,588 institutions in
the above-cited report to exclude any institutions that are banks,
savings associations, credit unions, or farm credit associations but
which do not have the word ``bank'' or ``credit union'' in the
institution name as recorded in the report. As a result, the total
number of nondepository financial institutions active in this market
fell from 270 to 150.
\149\ The CFPB counts institutions extending at least two loans
of any size in order to estimate institutions extending at least one
small loan, based on the assumption that some 50 percent of these
loans may have been for values greater than $1 million.
---------------------------------------------------------------------------
Data from UCC filings indicates that about 100 institutions were
active in the market for providing merchant cash advances to small
businesses in 2021.\150\
---------------------------------------------------------------------------
\150\ 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 Mar. 20, 2023).
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[[Page 35165]]
The Bureau estimates the number of factors in 2019 to be between
700-900 and assumes that most factors were providing financing to small
business.\151\
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\151\ 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 SBA 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. (As noted above, over $740 billion in
Paycheck Protection Program loans had been forgiven as of July 2022,
bringing SBA outstanding loan balances back down.\152\) Across Federal,
State, and municipal governments, the Bureau estimates that there are
likely over 100 government small business lending programs.\153\
Additionally, the Farm Credit System reports that, as of December 2019,
the Farm Credit System contained a total of 72 banks and
associations.\154\ All of these Farm Credit System institutions were
engaged in lending to small farms in 2019.\155\
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\152\ Pandemic Response Accountability Comm., Paycheck
Protection Program: Loan Forgiveness by the Numbers (July 2022),
<a href="https://www.pandemicoversight.gov/media/file/ppp-loan-forgiveness-fact-sheet-july-2022-updatepdf">https://www.pandemicoversight.gov/media/file/ppp-loan-forgiveness-fact-sheet-july-2022-updatepdf</a>.
\153\ 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.
\154\ 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/report.pdf?assetId=395570">https://www.farmcreditfunding.com/ffcb_live/serve/public/pressre/finin/report.pdf?assetId=395570</a>. The CFPB 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.
\155\ Calculated from Young, Beginning, and Small Farmer Report
data accessed on June 17, 2022, <a href="https://reports.fca.gov/CRS/search-institution.aspx">https://reports.fca.gov/CRS/search-institution.aspx</a>.
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E. Challenges for Women-Owned, Minority-Owned, and LGBTQI+-Owned Small
Businesses
Within the context of small business financing, women-owned,
minority-owned, and LGBTQI+-owned small businesses often face
relatively challenges than their counterparts to obtain credit. In line
with congressional purpose, information collected about these
businesses may provide opportunities for community development lending,
and the information collected may be particularly important to support
fair lending analysis and enforcement.
Women-owned, minority-owned, and LGBTQI+-owned small businesses
have smaller cash reserves on average, leaving them less able to
weather 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.\156\ 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.\157\ As a result, many small businesses,
especially those owned by women, minorities, and LGBTQI+ individuals,
may have a greater need for financing in general and particularly
during economic downturns.
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\156\ 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">https://www.alignable.com/forum/alignable-road-to-recovery-report-february-2021</a>.
\157\ 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>. See also Diana Farrell et
al., JP Morgan Chase Inst., Small Business Owner Race, Liquidity,
and Survival, at 5 (July 2020), <a href="https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/institute/pdf/institute-small-business-owner-race-report.pdf">https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/institute/pdf/institute-small-business-owner-race-report.pdf</a> (finding in a sample of firms
founded in 2013 and 2014 that after one year in business white-owned
firms had on average 19 cash buffer days compared to 14 for
Hispanic-owned firms and 12 for Black-owned firms).
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Policy responses to support small businesses in economic downturns
may struggle to reach small businesses owned by women, minorities, and
LGBTQI+ individuals. For example, although LGBTQI+-owned small
businesses were more likely to apply for Paycheck Protection Program
loans, they were less likely to receive all of the funds that they
applied for, and more likely to have gotten none of the funding they
applied for.\158\
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\158\ Spencer Watson et al., LGBTQ-Owned Small Businesses in
2021, Ctr. for LGBTQ Econ. Advancement & Rsch. and Movement
Advancement Project, at 8 (July 2022), <a href="https://www.lgbtmap.org/file/LGBTQ-Small-Businesses-in-2021.pdf">https://www.lgbtmap.org/file/LGBTQ-Small-Businesses-in-2021.pdf</a> (using data from the Federal
Reserve's Small Business Credit Survey, which began collecting
demographic data on LGBTQ small business ownership in 2021).
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Established relationships between applicants and lenders were often
critical to approvals in the earliest period of Paycheck Protection
Program underwriting; \159\ many minority-owned \160\ and women-owned
\161\ businesses did not have such relationships. Minority borrowers
with limited English proficiency may also have faced difficulties
overcoming language barriers,\162\ particularly during the first round
of the Paycheck Protection Program in April 2020 when application
materials had not yet been translated from English.\163\ Further, many
minority-owned and women-owned firms are sole proprietorships and
independent contractors, both of which received delayed access to
Paycheck Protection Program loans.\164\
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\159\ 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 Paycheck Protection Program loan by 57
percent). See generally 86 FR 7271, 7280 (Jan. 27, 2021) (noting
that many lenders restricted access to Paycheck Protection Program
loans to existing customers, which may run a risk of violating ECOA
and Regulation B).
\160\ Claire Kramer Mills, Fed. Rsrv. 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 Paycheck Protection Program
loans for such firms); Fed. Rsrv. 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/survey/2021/2021-report-on-firms-owned-by-people-of-color">https://www.fedsmallbusiness.org/survey/2021/2021-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'').
\161\ Cf. Mariel Padilla, `I feel like I'm drowning': Women
Business Owners Keep Hitting New Barriers to Federal Loan Aid, 19th
(Apr. 23, 2021), <a href="https://19thnews.org/2021/04/women-small-businesses-loan/">https://19thnews.org/2021/04/women-small-businesses-loan/</a> (stating that historically higher rates of loan
denials for women of color than for white men result in less
established banking relationships and thereby reduced access to
Federal support disbursed through banks).
\162\ See Emily Ryder Perlmeter, Fed. Rsrv. Bank of Dallas, How
PPP Loans Eluded Small Businesses of Color (Nov. 29, 2021), <a href="https://www.dallasfed.org/cd/communities/2021/1129">https://www.dallasfed.org/cd/communities/2021/1129</a> (detailing language
barriers among small business owners of color seeking Paycheck
Protection Program loans, particularly Hispanic and Asian owners who
were not fluent in English).
\163\ See Press Release, Rep. Judy Chu, House Dems Urge SBA to
Translate Resources into 10 Most Common Languages (Apr. 9, 2020),
<a href="https://chu.house.gov/media-center/press-releases/house-dems-urge-sba-translate-resources-10-most-common-languages">https://chu.house.gov/media-center/press-releases/house-dems-urge-sba-translate-resources-10-most-common-languages</a>.
\164\ 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>; see also Mariel
Padilla, `I feel like I'm drowning': Women Business Owners Keep
Hitting New Barriers to Federal Loan Aid, 19th (Apr. 23, 2021),
<a href="https://19thnews.org/2021/04/women-small-businesses-loan/">https://19thnews.org/2021/04/women-small-businesses-loan/</a> (stating
that non-employer businesses affected by restrictions on sole
proprietor and independent contractor access to Paycheck Protection
Program loans are disproportionately owned by women and minorities).
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[[Page 35166]]
Applicants whose owners belong to protected categories may have
received different program outcomes when applying for Paycheck
Protection Program loans, although limitations in demographic
information for Paycheck Protection Program loans have hindered fair
lending analyses.\165\ Even for such firms that did obtaining Paycheck
Protection Program loans, they may have faced different outcomes with
respect to loan forgiveness.\166\
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\165\ Rocio Sanchez-Moyano, Fed. Rsrv. 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 Paycheck Protection Program loans);
86 FR 7271, 7280 (Jan. 27, 2021) (noting that facially neutral
Paycheck Protection Program policies such as limiting loans to
businesses with pre-existing relationships may run a risk of
violating ECOA and Regulation B due to a disproportionate impact on
a prohibited basis).
\166\ For example, Black-owned firms applied to fintechs for
Paycheck Protection Program loans at a high rate and certain
fintechs or banks that partnered with fintechs have also had a high
rate of unforgiven Paycheck Protection Program loans. See Max Reyes,
Bank Behind Fintech's Rise Reels in Billions in Pandemic's Wake,
Bloomberg (Aug. 22, 2022), <a href="https://www.bloomberg.com/news/articles/2022-08-21/bank-behind-fintech-s-rise-reels-in-billions-in-pandemic-s-wake">https://www.bloomberg.com/news/articles/2022-08-21/bank-behind-fintech-s-rise-reels-in-billions-in-pandemic-s-wake</a> (reporting that, as of July 2021, the share of unforgiven
Paycheck Protection Program loans at Kabbage, a fintech, and at
Cross River, a bank that partnered with fintechs, was 34 percent and
16 percent, respectively); Who Benefited from PPP Loans (showing
that Black-owned firms applied to fintechs at higher rates than
other firms).
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As demonstrated by the impact of the COVID-19 pandemic on small
businesses, small business lending data are essential to better
understand the small business financing landscape to maintain and
expand support for this key part of the U.S. economy.
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.\167\ 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.'' \168\ 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 small business lending data collected
and reported pursuant to section 1071 to facilitate the enforcement of
fair lending laws, and to identify business and community development
needs and opportunities across the United States.
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\167\ 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).
\168\ 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,'' \169\ which include ECOA, the Home Mortgage
Disclosure Act of 1975 (HMDA),\170\ the Fair Housing Act,\171\ and
other Federal and State anti-discrimination laws.
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\169\ Id.
\170\ 12 U.S.C. 2801 et seq.
\171\ 42 U.S.C. 3601 through 3619.
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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.'' \172\ 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.\173\
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\172\ Public Law 93-495, tit. V, section 502, 88 Stat. 1500,
1521 (1974).
\173\ See Equal Credit Opportunity Act Amendments of 1976,
Public Law 94-239, section 701(a), 90 Stat. 251, 251 (1976).
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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, gender identity, and sex characteristics),\174\ 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 Federal Consumer Credit Protection
Act.\175\
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\174\ In March 2021, the CFPB 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, CFPB, 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
14363, 14365 (Mar. 16, 2021). As discussed further in the section-
by-section analysis of Sec. 1002.102(k) and (l), regarding the
definitions of LGBTQI+ individual and LGBTQI+-owned business,
respectively, the CFPB interprets ECOA's and Regulation B's
prohibitions on the basis of sex to also include sex
characteristics, including intersex traits.
\175\ 15 U.S.C. 1601 et seq.
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Multiple Federal regulators can enforce ECOA and Regulation B and
apply various penalties for violations. The enforcement provisions 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
CFPB 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 CFPB is
required to refer matters to the Department of Justice (DOJ) when it
has reason to believe that a creditor has engaged in a pattern or
practice of lending
[[Page 35167]]
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 CFPB, and the FTC. See 15 U.S.C. 1691c;
Regulation B Sec. 1002.16(a). Motor vehicle dealers are subject to
the Board's Regulation B (12 CFR part 202); the CFPB's rules,
including this 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.
\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 CFPB'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 is potential 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 is enforced by
the CFPB, 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
Title VIII of the Civil Rights Act of 1968, as amended (Fair
Housing Act), 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\
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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 CFPB uses the term ``disability'' to refer to what the
Fair Housing Act and its implementing regulations describe as 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).
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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.\187\ 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,\188\ 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.\189\ In Fair Housing Act 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.\190\
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\187\ 42 U.S.C. 3610(g)(1) and (2).
\188\ See 42 U.S.C. 3614(a).
\189\ 42 U.S.C. 3612(o)(1).
\190\ 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 Fair Housing Act or upon receipt of information from a
consumer compliance examination or other source suggesting a violation
of the Fair Housing Act, 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 Fair
Housing Act, to the DOJ.\191\ Private parties may also bring claims
under the civil enforcement provisions of the Fair Housing Act.\192\
---------------------------------------------------------------------------
\191\ 59 FR 2939, 2939 (Jan. 17, 1994).
\192\ See 42 U.S.C. 3613.
---------------------------------------------------------------------------
iv. Other Fair Lending Laws
Several other Federal statutes seek to promote fair lending. The
CRA affirmatively encourages 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.\193\ (See part II.F.2.i below for additional
discussion of the CRA.) The Americans with Disabilities Act of 1990
prohibits discrimination against persons with disabilities in the
provision of goods and services, including credit services.\194\
Sections 1981 \195\ and 1982 \196\ of the Federal Civil Rights Acts are
broad anti-discrimination laws that have been applied to many aspects
of credit transactions.\197\
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\193\ See 12 U.S.C. 2901 et seq.
\194\ See 42 U.S.C. 12101 et seq.
\195\ 42 U.S.C. 1981(a).
\196\ 42 U.S.C. 1982.
\197\ See, e.g., Juarez v. Soc. Fin., Inc., No. 20-CV-03386-HSG,
2021 WL 1375868, at *7 (N.D. Cal. Apr. 12, 2021) (denying motion to
dismiss section 1981 claim and finding that ``the ECOA was not
intended to limit any of the broad protections afforded by Sec.
1981''); Perez v. Wells Fargo & Co., No. 17-CV-00454-MMC, 2017 WL
3314797, at *3 (N.D. Cal. Aug. 3, 2017) (denying motion to dismiss
for section 1981 claim and rejecting contention that ECOA superseded
section 1981, noting that, although ECOA was a more specific
statute, ECOA did not conflict with the section 1981 claims because
``[a] creditor can comply with Sec. 1981 and the ECOA by not
discriminating on the basis of any of the categories listed in the
two statutes''); 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 35168]]
Many States and municipalities have also enacted fair lending, fair
housing, and/or civil rights laws (often modeled on their Federal
counterparts) that broadly prohibit credit discrimination, including
protections for business credit.\198\
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\198\ 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.
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v. Facilitating Enforcement
To achieve the congressionally mandated purpose of facilitating
enforcement of fair lending laws, the Bureau 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 reporting in order to also use these data in
their prioritization, peer analysis, redlining reviews, and screening
processes to select institutions for monitoring, examination, or
investigation. Data collected pursuant to section 1071 will facilitate
more efficient fair lending examinations. For example, regulators will
be able to use pricing and other data to prioritize fair lending
examinations--without such data, some financial institutions might face
unnecessary examination burden while others whose practices warrant
closer review may not receive sufficient scrutiny.
Moreover, as discussed in part V below, the Bureau believes
specific aspects of the rule offer particular benefits for the
enforcement of fair lending laws. For example, the inclusion of pricing
data such as interest rate and fees will provide information on
disparities in pricing outcomes, and data such as gross annual revenue,
denial reasons, and time in business will enable a more refined
analysis and understanding of disparities in both underwriting and
pricing outcomes. While these data alone generally will not establish
compliance with fair lending laws, regulators, community groups,
researchers, and financial institutions will be able to use the data to
identify potential disparities in small business lending based on
disaggregated categories of race and ethnicity. Overall, the data
collected and reported under the rule will allow, for the first time,
for comprehensive and market-wide fair lending risk analysis that
enables a better understanding of disparities in both underwriting and
pricing outcomes.
2. Identifying Business and Community Development Needs and
Opportunities
The second congressionally mandated 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.\199\ While section 1071
does not expressly define the phrase ``business and community
development needs,'' other Federal statutes and regulations, including
the CRA and the Riegle Community Development and Regulatory Improvement
Act of 1994,\200\ 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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\199\ ECOA section 704B(a).
\200\ 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 its rule implementing section
1071 will 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 data provided under this rule, the public
will 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
will not only assist in identifying potentially discriminatory
practices, but will contribute to a better understanding of the
experiences that members within certain communities may share in the
small business financing market.
Increased transparency about application and lending practices
across different communities will improve credit outcomes, and thus
community and business development. Lenders will be able to better
understand small business lending market conditions and determine how
best to provide credit to borrowers, where currently they cannot
conduct very granular or comprehensive analyses because the data on
small business lending are limited. As reduced uncertainty helps
lenders to identify potentially profitable opportunities to extend
responsible and affordable credit, small businesses stand to benefit
from increased credit availability. Transparency will also allow small
business owners to more easily compare credit terms and evaluate credit
alternatives; without these data, small business owners are limited in
their ability to shop for the credit product that best suits their
needs at the best price.
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.'' \201\ 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.\202\
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\201\ 12 U.S.C. 2901(a)(3).
\202\ 12 U.S.C. 2901(b).
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The legislative history for the CRA suggests that the concerns
motivating its passage included certain practices by banks including
redlining (i.e., declining to extend credit in neighborhoods populated
by ethnic or racial minorities) \203\ and community disinvestment
(i.e., taking deposits from lower-income areas, often populated by
ethnic or racial minorities, without
[[Page 35169]]
extending credit or banking services to residents of those areas).\204\
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.'' \205\ These requirements were first implemented by a
1978 rulemaking,\206\ and were amended in 1995 \207\ and 2005.\208\
These rulemakings, adopted by each of the agencies responsible for
ensuring compliance with the CRA, established specific performance
measures,\209\ requiring banks to disclose information about their
efforts to meet community credit needs via small business, small farm,
and community development lending.\210\
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\203\ 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.
\204\ 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 . . . .'').
\205\ 12 U.S.C. 2906(a)(1).
\206\ 43 FR 47144 (Oct. 12, 1978).
\207\ 60 FR 22156 (May 4, 1995).
\208\ 70 FR 44256 (Aug. 2, 2005).
\209\ 12 CFR 228.11.
\210\ See, e.g., 12 CFR 25.42, 228.11.
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The agencies tasked with ensuring compliance--including t
[…truncated; see source link]Indexed from Federal Register on May 31, 2023.
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.