BACKGROUND
Research conducted for the Department of Commerce has found minority-owned businesses tend to pay higher interest rates on business loans than those not minorityowned . A report by the Federal Reserve Bank of Atlanta found minority-owned firms more frequently applied for potentially higher-cost credit products and were also more likely to report challenges in obtaining credit , such as being offered high interest rates . In addition , research conducted for the Small Business Administration ( SBA ) found Black- and Hispanic-owned businesses were less likely to have business bank loans and more likely to use more expensive credit card financing . The 2020 Small Business Credit Survey found that small business applicants to non-bank lenders , such as online lenders and finance companies , were more likely to report high interest rates or unfavorable terms than applicants to depository institutions .
According to the National Community Reinvestment Coalition ( NCRC ), apparent discrimination in small business lending is not limited to race . They cite a study that found while LGBTQI + businesses were equally likely to apply for financing , they were less likely to receive it . The same report also noted LGBTQI + -owned businesses were 9 % more likely than non-LGBTQI + businesses to be told their denial was due to lenders not approving financing for “ businesses like theirs .”
At the same time , according to the CFPB , while small businesses are a critical part of the U . S . economy , it is not possible with current data to confidently answer basic questions regarding the ethnicity , race and sex of small business owners , and information pertaining to applications as opposed to originations . The CFPB believes data on small business lending is fragmented , incomplete and not standardized , making it difficult to conduct meaningful comparisons across products and over time .
THE DODD FRANK ACT
In 2010 , Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act , which contained requirements for lenders to collect data on small business lending in Section 1071 . In passing Section 1071 , Congress articulated two purposes for requiring the CFPB to collect data on small business credit applications and loans :
1 . Facilitate enforcement of fair lending laws .
2 . Enable communities , governmental entities and creditors to identify business and community development needs and opportunities of womenowned , minority-owned and small businesses .
It was not until 2021 that the CFPB proposed a rule to implement these requirements . The agency received approximately 2,100 comments on the proposed rule . In 2019 , the California Reinvestment Coalition filed a lawsuit which led to a court order requiring the CFPB to issue a final rule by March 31 , 2023 . The agency barely beat that deadline in issuing the rule the day before .
The CFPB added a new subpart B to Regulation B to implement the requirements of Section 1071 . In addition , the CFPB also made some conforming amendments to existing Regulation B .
COVERED FINANCIAL INSTITUTIONS
Rather than an asset-based exemption or a dollar-volume threshold for coverage , the CFPB ultimately decided on using an activity-based threshold for coverage .
This is good news for smaller financial institutions , as the proposal set the threshold at 25 small business loans per year . The CFPB estimates , based on 2019 data , the rule will cover roughly 100 credit unions and about 1,800 banks . This is a relatively small number of credit unions considering the NCUA Call Report data for December 2019 shows about 1,200 out of 5,300 total credit unions were active ( had at least one origination ) in the small business lending market . It is interesting to note credit unions increased their small business lending from $ 30 billion in 2008 to $ 71 billion in 2021 .
Had the CFPB kept the 25 small business loan threshold from the proposal in the final rule , 7 % of credit unions would have been covered , compared to 2 % of credit unions with the 100-loan threshold . A 25-loan threshold would have meant 70 % -73 % of all banks would be covered .
As stated above , the CFPB estimates , based on 2019 data , the rule will cover about 1,800 banks . In contrast to credit unions , almost all banks are active in small business lending . Based on FFIEC Call Report data for December 2019 , the CFPB estimates 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 .
The CFPB estimates the 100-loan threshold captures nearly 95 % of the share of small business loans originated by depository institutions .
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