Banks are wrong to oppose CFPB data collection for small-business loans

As Americans took to the streets to protest the police killings of George Floyd, Breonna Taylor and others, major banks and lenders were among the corporations that pledged tens of billions of dollars to new initiatives aimed at bridging racial economic inequality particularly for African Americans.

These high-profile public commitments were welcome news. But now, not quite two years later, key actors in the banking and lending industries are fighting to thwart regulations that will help close the racial wealth divide.

We currently collect no public demographic data on lending to small businesses by banks, credit unions or any other institutions. And banks are fighting to keep it that way, lobbying for narrow and ineffective rulemaking by the Consumer Financial Protection Bureau under Section 1071 of the Dodd-Frank reforms passed in 2010.

Lobbyists for both large banks and smaller lenders are working to sabotage the CFPB’s efforts. The Bank Policy Institute and Consumer Bankers Association each oppose the collection of pricing data, without which regulators and the public would struggle to identify disparate patterns in small business lending. The American Bankers Association, meanwhile, recently claimed that compliance costs from robust Section 1071 small business lending data rules would be double or even triple CFPB’s carefully calculated estimates — a hyperbolic claim.

The industry’s battle against Section 1071 rules has recently expanded beyond formal comment letters into more brute-force public relations tactics. Now bank and credit union lobbyists are telling reporters that lenders will abandon minority- and woman-owned small businesses if they are forced to report the same basic data already required in the mortgage market.

Along with home purchase loans, small-business loans are one of the most important private-sector tools available to strengthen local economies. Banking industry leaders who promised to help combat the economic pain and material indignities that define life for most communities of color should be ecstatic about improving racial equity in business lending — and in discovering where it’s missing or needs improvement.

Instead, lobbyists for lenders are trying to protect a broken status quo. If they succeed it will be far harder to heal the racial economic wounds in our society. Those wounds are deep.

Median earnings for Black women are $7,000 less per year than for white women. That gap is $17,000 for Black and white men. Unmarried Black mothers have a median wealth of exactly zero dollars, while the median single white mother has a net worth of more than $14,000. Three-quarters of all white families own a home, compared to about 45% of all Black families. The median wealth of a white American is $160,000, while the median wealth of Black Americans is less than $9,000.

Lending institutions are actively maintaining this catastrophic chasm between the races. Whether by official policy or informal individual bias, the institutions that control the money faucet behave differently when the person applying for a loan is Black.

Mystery-shopper tests conducted by the National Community Reinvestment Coalition at bank branches in Los Angeles, Atlanta and Washington, D.C., have repeatedly documented different treatment by bank staff for white and non-white small business loan customers. Black and Latino mystery shoppers interested in government-backed Paycheck Protection Program loans during the pandemic were again treated differently than white testers.

This evidence of racial bias in small-business lending indicates a high likelihood of similar experiences, as well as discriminatory outcomes and under-representation in lending, for minority and women small business owners nationwide. We know that’s the case with mortgage lending, because banks are required to collect and report mortgage data. That data shows Black, Latino and Native American borrowers remain dramatically underserved in the mortgage market.

We can anticipate similar discrepancies in small-business lending, but we don’t know for sure. We have no meaningful data from lenders. But that’s about to change. The CFPB is poised to issue a final rule that will finally require lenders to start collecting and disclosing more data on the race and gender of small business loan applicants, just like they do for mortgage data. All that remains is determining what exact rules will be applied and enforced by the CFPB to fulfill the data mandate in Section 1071.

If the rules are shaped by curiosity and social responsibility rather than fear, we will finally be able to see who lenders are serving, and who they aren’t, to meet the small businesses needs in their communities. If bank lobbyists get their way, the rules will be clumsy, flimsy, and unlikely to spark meaningful change.

If you are a lending executive with a sincere desire to be part of the solution to the nation’s socioeconomic divides, then this is a golden opportunity to embrace a simple data collection effort that will enable real progress to follow your public positioning.