Small-business loans need their own HMDA

Businesses owned by people of color are one of the fastest-growing sectors in the country right now. The number of minority business enterprises (MBEs) increased by 38% from 2007 to 2012, while the number of nonminority firms experienced a 5% decrease over the same period. MBEs also serve as engines of employment and economic development in their communities — they create jobs at a faster rate than white-owned firms and are more likely to hire locally.

Despite the accelerated growth of MBEs, we know from what little data is currently available that minority-owned businesses — Latino- and black-owned firms specifically — are starved of the financing and capital they need to reach their full potential.

MBEs have greater difficulty accessing loans from financial institutions compared with white-owned firms, pay higher interest when they borrow, receive smaller loans and have their loan applications rejected more often.

Small Business Administration lending data, analyzed by the Wall Street Journal, shows that minority-owned businesses don’t get the capital they need. In 2014, black-owned businesses only received 2.3% of SBA loans, while Latino-owned businesses only received about 5% percent of those loans. These numbers are absurd given that in 2012, black-owned businesses made up 9.3% of total firms and Latino-owned businesses 12%.

Publicly available data on small-business lending by race and ethnicity would help improve these numbers. That is why Section 1071 of the Dodd-Frank Act is vital for communities of color.

Section 1071 gives the Consumer Financial Protection Bureau the responsibility to implement a rule requiring financial institutions to report data on small-business applicants by various categories, including race, ethnicity, revenue type of business and action taken on the application. The CFPB is only now getting around to writing that rule, but any progress may be stopped by Congress before the bureau implements anything.

Multiple bills in the House and Senate propose to repeal Section 1071 completely. This includes both the Financial Choice Act and the Community Lending Enhancement and Regulatory Relief (CLEARR) Act. The U.S. Treasury has also called for repeal of Section 1071 in a report prepared for President Trump. The Treasury report says, “Many lenders have expressed concern that this requirement will be costly to implement, will directly contribute to higher small business borrowing costs, and reduce access to small business loans.”

The Treasury report has a point. To comply with Section 1071, financial institutions would have to develop new software, train employees and audit the data every year. The cost won’t be insignificant, but financial institutions went through the same growing pains after the passage of the Home Mortgage Disclosure Act in 1975, which requires banks to collect home lending data.

Although financial institutions opposed the passage of HMDA and its expansion in 1989 and 2002, the general requirement to collect home lending data has become an accepted part of the mortgage lending landscape. It is also clear that the data collection required by HMDA has had more of a positive impact than a negative one. HMDA, in conjunction with other fair-lending laws and the Community Reinvestment Act, led to increased enforcement actions against discriminatory practices, and spurred financial institutions to curtail redlining and increase reinvestment.

Section 1071 will have a similar effect. The benefits of the statutory provision will far outweigh the cost of data collection, especially in communities of color. And given the great untapped potential of the MBE market, data about the credit needs of minority-owned businesses could also be invaluable to lenders. It will allow all stakeholders to identify the credit needs of our communities, understand basic trends in small-business lending and enforce fair-lending laws.

Comprehensive data would show the types of businesses that don’t get capital and where they are located, helping organizations like Greenlining to effectively advocate for MBEs. It would also help lenders create financing products and focus efforts in specific areas to both reach untapped markets and better meet the needs of MBEs. Right now, financial institutions, advocacy groups and organizations that provide technical assistance to businesses all must rely on incomplete data sets and anecdotal information to serve and advocate for the MBE market.

Data would also shed light on important industry trends. We know from working with our coalition of organizations serving MBEs that these businesses often turn to online lenders for fast loans, and some get caught in debt traps because of high interest rates or predatory practices. Sadly, we do not know the full extent of these problems in the small-business world. Better information would help lenders understand what types of businesses they are losing to fintech and how to improve outreach. Regulators and advocates also need to understand these trends to combat predatory online lenders targeting MBEs and other businesses.

Data would also empower government agencies to more effectively fight discrimination against MBEs. Every year, the Department of Justice still fines numerous financial institutions millions of dollars for mortgage-related redlining. Many researchers have shown that banks also discriminate against minority small-business owners, but government agencies do not have enough information to effectively enforce fair-lending laws on the small-business lending sector. Congress created HMDA to ensure that communities of color were not intentionally denied home loans and we must do the same for small-business loans. Right now, regulators essentially let redlining practices against MBEs slide. This is simply unacceptable.

Although we do need to consider the costs of collecting data, it is also important to consider how that data can help address continuing racial disparities. Small-business lending data will empower government, advocates and lenders to better serve and protect MBEs, leading to a stronger overall economy. Congress should leave Section 1071 alone and let the CFPB finally implement a rule that should have been implemented long ago.