MBN USA

February 10, 2022

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Black, Latinx entrepreneurs contend with lending discrimination

Prosperity Now recently submitted a comment letter to the Consumer Financial Protection Bureau (CFPB) in support of the CFPB's proposed rule on small business lending data collection. The proposed rule, Section 1071 of the Dodd-Frank Act, would require financial institutions to collect and report data on their small business lending, including data on loan recipients' race and ethnicity. 

Entrepreneurs of color face numerous barriers to starting and growing small businesses, including difficulty accessing capital. Black and Latinx entrepreneurs, in particular, have to contend with lending discrimination. This means that when compared to their White counterparts, these entrepreneurs receive lower amounts of financing or financing on less affordable terms, while some do not receive financing at all. For instance, the Federal Reserve's Small Business Credit Survey found that even among firms with a low credit risk, Black- and Latinx-owned firms were half as likely to receive the full amount of financing they sought in 2020, compared to White-owned firms. The bottom line? Systemic racism in lending practices means that Black- and Latinx-owned firms are worth less than White-owned ones. 

Section 1071 has the potential to achieve greater equity for businesses of color. Under the proposed rule, financial institutions would report data on their small business lending to the CFPB, which would then make the data available to the public. A main purpose of the rule is to help identify the needs of small businesses, including their ability to access credit. Having data on the race and ethnicity of loan recipients should provide a clearer picture of where lending discrimination is occurring and, most importantly, give authorities the opportunity to address it.

In our comment letter, we highlight the ways in which the rule would improve equity in lending, such as the proposal for financial institutions to collect disaggregated racial and ethnic data (this means the data would be broken out by country of origin in addition to the broader racial or ethnic categories). Disaggregated data can pinpoint whether certain ethnic subgroups are facing more lending discrimination than others, an issue particularly important for the Asian American Pacific Islander (AAPI) community, which is often viewed as a monolith.

We also share recommendations on how to make the rule even stronger. For example, we propose that additional data points, like credit scores, be collected to give more insight into why credit applications are accepted or denied. We also recommend that the CFPB publish its own analyses of the raw data to make it more accessible to the public. And we encourage the CFPB to periodically reassess Section 1071, so the rule continues to fulfill its purpose of furthering fair lending.

We are grateful to our many partners that signed on to our comment letter to show their support, as well as to the advocates who submitted their own letters. Making our voices heard is one way we can ensure small business owners of color have equitable access to the capital they need.