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CFPB Aims to Make Small Business Lending More Transparent

Small businesses might eventually enjoy fairer lending practices — at least, that’s the end goal of a recent Consumer Financial Protection Bureau rule proposal.

The Small Business Administration says small businesses employ more than a third of America’s working adults, or about 60 million adults. It adds that during the last decade, through 2019, small businesses created twice as many jobs as their larger counterparts.

Despite being a powerful economic engine, some small businesses are treated as lesser than others. Consider this 2020 research from the Brookings Institution:

“On average, it took 31 days for small businesses with paid employees in majority-Black ZIP codes to receive PPP loans — seven days longer than those in majority-white communities. For non-employer businesses, the loan delay between majority-Black and majority-white neighborhoods grew to nearly three weeks. This delay is particularly acute because, according to the JPMorgan Chase Institute, in at least 90% of all majority-Black and majority-Latino or Hispanic neighborhoods, a majority of small businesses have cash buffers of less than three weeks, compared to only 35% of majority-white neighborhoods.

“Beyond the preexisting disparate access to banking, a matched-pair test conducted in April found that Black business owners were more likely to be denied PPP loans compared to white business owners with similar application profiles due to outright lending discrimination.”

However, a proposed CFPB rule would help the organization learn more about how this discrimination takes place and create more transparency in the small business lending marketplace. Here’s how:

The CFPB’s New Small Business Lending Measure

The agency says this rule, if finalized, would “require lenders to disclose information about their lending to small businesses, allowing community organizations, researchers, lenders, and others to better support small business and community development needs.” Hand-in-hand with this, it also would require lenders to collect information about small businesses’ credit applications on products such as term loans, lines of credit, credit cards and merchant cash advances.

The CFPB says the information should help both it and the public better understand:

What kind of credit small businesses are seeking

“Lenders would be required to report information about the purpose, type, and amount of credit being applied for, the amount approved or originated, census tract, gross annual revenue, industry code, number of workers, time in business, number of principal owners and key elements of the cost of the credit (the interest rate and certain fees),” the CFPB says. This data would be key to better understanding who tries to borrow.

Small business demographic information

Among the information that lenders would be required to gather and report? Ethnicity, race and sex of the applicant’s principal owners, and whether the business is owned by either women or minorities. “Demographic information about an applicant’s owners would help the government, lenders and the public identify areas of business and community development needs, new lending program opportunities and potential fair lending concerns,” the CFPB says.

The lifecycle of an application

The new rule would open several new windows into the small business lending world, but perhaps the biggest one pertains to the applications themselves. Namely, the CFPB has never had access to application-level information before. The new rule would require lenders to “report information about the application date, method the application was received (in-person, telephone, online or mail), recipient of the application (the lender or its affiliate, or submitted via a third party), action taken by the lender on the application (originated, approved but not accepted, denied, withdrawn by the applicant or incomplete), date of action taken and denial reasons when applicable.”

But while the CFPB would disclose data on an application level, the agency is discussing modifying or withholding some data based on privacy risks.

Whether the CFPB’s rule will see the light of day remains to be seen. For now, if you’re a small business that’s seeking financing, it helps to have some professional help on your side. McManamon & Co. is an accounting, tax, fraud, forensic and consulting firm that offers custom services to small- and midsize businesses across a broad spectrum of industries. That includes our consulting services, which include helping businesses apply for and secure business loans and other means of financing.

We can help you navigate the small business lending process. Learn more by calling us at 440.892.8900 or contacting us online today.

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