Small Business Lending Data Collection Under the Equal Credit Opportunity Act (Regulation B)

Federal RegisterOct 8, 2021

Ask Donna

What actually matters in this document.

Text

BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1002

[Docket No. CFPB-2021-0015]

RIN 3170-AA09

Small Business Lending Data Collection Under the Equal Credit Opportunity Act (Regulation B)

AGENCY:

Bureau of Consumer Financial Protection.

ACTION:

Proposed rule; request for public comment.

SUMMARY:

The Bureau of Consumer Financial Protection (Bureau) is publishing for public comment a proposed rule amending Regulation B to implement changes to the Equal Credit Opportunity Act (ECOA) made by section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Consistent with section 1071, the Bureau is proposing to require covered financial institutions to collect and report to the Bureau data on applications for credit for small businesses, including those that are owned by women or minorities. The Bureau's proposal also addresses its approach to privacy interests and the publication of section 1071 data; shielding certain demographic data from underwriters and other persons; recordkeeping requirements; enforcement provisions; and the proposed rule's effective and compliance dates.

DATES:

Comments must be received on or before January 6, 2022.

ADDRESSES:

You may submit comments, identified by Docket No. CFPB-2021-0015 or RIN 3170-AA09, by any of the following methods:

•

Federal eRulemaking Portal:

https://www.regulations.gov

. Follow the instructions for submitting comments.

•

Email:

2021-NPRM-1071@cfpb.gov

. Include Docket No. CFPB-2021-0015 or RIN 3170-AA09 in the subject line of the message.

•

Mail/Hand Delivery/Courier:

Comment Intake—Section 1071 Small Business Lending Data Collection, Bureau of Consumer Financial Protection, 1700 G Street NW, Washington, DC 20552.

Instructions:

The Bureau encourages the early submission of comments. All submissions should include the agency name and docket number or Regulatory Information Number (RIN) for this rulemaking. Because paper mail in the Washington, DC area and at the Bureau is subject to delay, and in light of difficulties associated with mail and hand deliveries during the COVID-19 pandemic, commenters are encouraged to submit comments electronically. In general, all comments received will be posted without change to

https://www.regulations.gov.

In addition, once the Bureau's headquarters reopens, comments will be available for public inspection and copying at 1700 G Street NW, Washington, DC 20552, on official business days between the hours of 10 a.m. and 5 p.m. Eastern Time. At that time, you can make an appointment to inspect the documents by telephoning 202-435-7275.

All comments, including attachments and other supporting materials, will become part of the public record and subject to public disclosure. Proprietary information or sensitive personal information, such as account numbers or Social Security numbers, or names of other individuals, should not be included. Comments will not be edited to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT:

Camille Gray, Paralegal Specialist; Tola Adenuga, Regulatory Implementation and Guidance Specialist; Tarrian Ellis, Honors Attorney; Jaydee DiGiovanni, Counsel; Kristine M. Andreassen, Pavitra Bacon, Benjamin Cady, Joseph Devlin, Amy Durant, Gregory Evans, David Jacobs, Kathryn Lazarev, Lawrence Lee, Kristen Phinnessee, or Michael Scherzer, Senior Counsels, Office of Regulations, at 202-435-7700 or

https://reginquiries.consumerfinance.gov/

. If you require this document in an alternative electronic format, please contact

CFPB_Accessibility@cfpb.gov

SUPPLEMENTARY INFORMATION:

I. Summary of the Proposed Rule

In 2010, Congress passed the Dodd-Frank Act. Section 1071 of that Act amended ECOA

to require that financial institutions collect and report to the Bureau certain data regarding applications for credit for women-owned, minority-owned, and small businesses.

Section 1071's statutory purposes are to (1) facilitate enforcement of fair lending laws, and (2) enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.

15 U.S.C. 1691

et seq.

Public Law 111-203, tit. X, section 1071, 124 Stat. 1376, 2056 (2010), codified at ECOA section 704B, 15 U.S.C. 1691c-2.

Section 1071 specifies a number of data points that financial institutions are required to collect and report, and also provides authority for the Bureau to require any additional data that the Bureau determines would aid in fulfilling section 1071's statutory purposes. Section 1071 also contains a number of other requirements, including those that address restricting the access of underwriters and other persons to certain 1071 data; recordkeeping; publication of 1071 data; and modifications or deletions of data prior to publication in order to advance a privacy interest.

Section 1071 directs the Bureau to prescribe such rules and issue such guidance as may be necessary to carry out, enforce, and compile data pursuant to section 1071, and permits the Bureau to adopt exceptions to any requirement or to exempt financial institutions from the requirements of section 1071 as the Bureau deems necessary or appropriate to carry out the purposes of section 1071. The Bureau is proposing to add a new subpart B to Regulation B to implement the requirements of section 1071.

Key aspects of the Bureau's proposal are summarized below.

The Bureau interpreted section 1071 to mean that obligations for financial institutions to collect, maintain, and submit data “do not arise until the Bureau issues implementing regulations and those regulations take effect.”

See

Letter from Leonard Kennedy, General Counsel, CFPB, to Chief Executive Officers of Financial Institutions under Section 1071 of the Dodd-Frank Act (Apr. 11, 2011),

https://files.consumerfinance.gov/f/2011/04/GC-letter-re-1071.pdf

If finalized, the Bureau's proposed rule would create the first comprehensive database of small business credit applications in the United States. This would include critical information about women-owned and minority-owned small businesses to help regulators and the public identify and address fair lending concerns. The database would also enable a range of stakeholders to better identify business and community development needs and opportunities for small businesses, including women-owned and minority-owned small businesses. Just as the Bureau works in other ways to help foster fairness and opportunity in consumer financial services markets for all consumers, the proposed 1071 rule is structured to realize these same goals for the small business market—for

all

small businesses within the scope of the rule, including those that are owned by women and minorities. Research indicates that minority-owned small businesses face particular obstacles, as do those that are women-owned, but the current lack of comprehensive, quantitative data has made it difficult to understand the extent of these obstacles and address them with responsive

policy. By shining a light on lending practices in this area, the Bureau believes that the 1071 data would not only foster a culture of compliance but bring particular attention to the underserved parts of the small business market that have traditionally faced the greatest obstacles to success. In this way, the proposed rule is intended to help small businesses drive inclusive and equitable growth.

Scope.

The Bureau is proposing to require financial institutions to collect and report 1071 data regarding applications for credit for small businesses, including those that are owned by women and minorities. The Bureau is not proposing to require that financial institutions collect and report data regarding applications for women-owned and minority-owned businesses that are

not

small. Because most existing businesses are small businesses, covering small businesses necessarily means nearly all women-owned and minority-owned businesses will also be covered. The Bureau believes that this scope is consistent with the statute and will allow the rule to carry out section 1071's purposes without requiring collection of data that would be of limited utility.

Covered financial institutions.

Consistent with language from section 1071, the Bureau is proposing to define a “financial institution” to include any partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative organization, or other entity that engages in any financial activity. Under the proposed definition, the Bureau's 1071 rule would apply to a variety of entities that engage in small business lending, including depository institutions (

i.e.,

banks, savings associations, and credit unions),

online lenders, platform lenders, community development financial institutions (both depository and nondepository institutions), lenders involved in equipment and vehicle financing (captive financing companies and independent financing companies), commercial finance companies, governmental lending entities, and nonprofit nondepository lenders.

For purposes of this notice of proposed rulemaking, the Bureau is using the term depository institution to mean any bank or savings association defined by the Federal Deposit Insurance Act, 12 U.S.C. 1813(c)(1), or credit union defined pursuant to the Federal Credit Union Act, 12 U.S.C. 1751

et seq.,

as implemented by 12 CFR 700.2. The Bureau notes that the Dodd-Frank Act defines a depository institution to mean any bank or savings association defined by the Federal Deposit Insurance Act, 12 U.S.C. 1811

et seq.;

there, that term does not encompass credit unions. 12 U.S.C. 5301(18)(A), 1813(c)(1). To facilitate analysis and discussion, the Bureau is referring to banks and savings associations together with credit unions as depository institutions throughout this notice, unless otherwise specified.

The Bureau's rules, including this proposed rule to implement section 1071, generally do not apply to motor vehicle dealers, as defined in section 1029(f)(2) of the Dodd-Frank Act, that are predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both. 12 U.S.C. 5519.

The Bureau's proposal uses the term “covered financial institution” to refer to those financial institutions that would be required to comply with section 1071's data collection and reporting requirements. The Bureau is proposing that a covered financial institution would be a financial institution that originated at least 25 covered credit transactions for small businesses in each of the two preceding calendar years. The Bureau is not proposing an asset-based exemption threshold for depository institutions, or any other general exemptions for particular categories of financial institutions.

The Bureau is also proposing to permit creditors that are not covered financial institutions to voluntarily collect and report data under section 1071 in certain circumstances.

Covered credit transactions.

The Bureau is proposing to require that covered financial institutions collect and report data regarding covered applications from small businesses for covered credit transactions. The Bureau is proposing to define a “covered credit transaction” as one that meets the definition of business credit under existing Regulation B, with certain exceptions. Loans, lines of credit, credit cards, and merchant cash advances (including such credit transactions for agricultural purposes and those that are also covered by the Home Mortgage Disclosure Act of 1975 (HMDA)

) would all be covered credit transactions within the scope of this proposed rule. The Bureau is proposing to exclude trade credit, public utilities credit, securities credit, and incidental credit. Factoring, leases, consumer-designated credit used for business purposes, and credit secured by certain investment properties would also not be covered credit transactions.

12 U.S.C. 2801

et seq.

Covered applications.

The Bureau is proposing to define a “covered application”—which would trigger data collection and reporting and related requirements—as an oral or written request for a covered credit transaction that is made in accordance with procedures used by a financial institution for the type of credit requested. This proposed definition of covered application is largely consistent with the existing Regulation B definition of that term. However, the Bureau is also proposing that certain circumstances would not be covered applications, even if they are considered applications under existing Regulation B. Specifically, the Bureau is proposing that a covered application does not include (1) reevaluation, extension, or renewal requests on an existing business credit account, unless the request seeks additional credit amounts; or (2) inquiries and prequalification requests.

Small business definition.

The Bureau is proposing to define a “small business,” about whose applications for credit data must be collected and reported, by reference to the definitions of “business concern” and “small business concern” as set out in the Small Business Act

and Small Business Administration (SBA) regulations. However, in lieu of using the SBA's size standards for defining a small business concern, the Bureau's proposed definition would look to whether the business had $5 million or less in gross annual revenue for its preceding fiscal year. The Bureau is seeking SBA approval for its alternate small business size standard pursuant to the Small Business Act.

15 U.S.C. 631

et seq.

See

15 U.S.C. 632(a)(2)(C).

Data to be collected and reported.

The Bureau's proposal addresses the data points that must be collected and reported by covered financial institutions for covered applications from small businesses. Many of the proposed data points are specifically enumerated in section 1071; for the others, the Bureau is proposing to use the authority granted by section 1071 to require financial institutions to collect and report any additional data that the Bureau determines would aid in fulfilling the purposes of section 1071. Certain of these data points are or could be collected from the applicant (or otherwise determined based on information provided or authorized by the applicant); other data points are based on information solely within the financial institution's control. The Bureau is proposing that covered financial institutions maintain procedures to collect applicant-provided data at a time and in a manner that is reasonably designed to obtain a response. The Bureau's proposal also addresses what financial institutions should do if, despite having such procedures in place, they are unable to obtain certain data from an applicant. A financial institution would be permitted to rely on statements made by an

applicant (whether in writing or orally) or information provided by an applicant when collecting and reporting 1071 data, although for most data points if the financial institution verifies the information provided it must report the verified information. The Bureau's proposal would also permit financial institutions to reuse certain previously collected data in certain circumstances.

As noted above, the Bureau's proposal includes certain data points that are, or could be, provided by the applicant. Some data points specifically relate to the credit being applied for: The credit type (which includes information on the credit product, types of guarantees, and loan term); The credit purpose; and the amount applied for. There are also data points that relate to the applicant's business: A census tract based on an address or location provided by the applicant; gross annual revenue for the applicant's preceding full fiscal year; the 6-digit North American Industry Classification System (NAICS) code appropriate for the applicant; the number of workers that the applicant has (

i.e.,

non-owners working for the applicant); the applicant's time in business; and the number of principal owners of the applicant.

There are also data points that would be provided by the applicant addressing the demographics of the applicant's ownership: Whether the applicant is a minority-owned business; whether the applicant is a women-owned business; and the ethnicity, race, and sex of the applicant's principal owners. The Bureau refers to these data points collectively as an applicant's “protected demographic information.” The Bureau is proposing that principal owners' ethnicity and race be collected from applicants using aggregate categories as well as disaggregated subcategories. The Bureau is proposing to permit principal owners to self-describe their sex (instead of or in addition to choosing male and/or female), and is seeking comment on whether and, if so, how its collection of principal owners' sex should incorporate sexual orientation and gender identity in light of the recent Supreme Court decision in

Bostock

Clayton County

and the Bureau's subsequent ECOA interpretive rule.

If an applicant does not provide any ethnicity, race, or sex information for any principal owners, the Bureau is proposing that the financial institution must collect at least one principal owner's race and ethnicity (but not sex) via visual observation or surname, but only if the financial institution meets with any principal owners in person or via electronic media with an enabled video component. The Bureau is proposing detailed instructions to assist financial institutions in collecting and reporting applicants' protected demographic information pursuant to section 1071. The Bureau is also proposing a sample data collection form, which would include a required notice to applicants that the financial institution cannot discriminate on the basis of an applicant's minority- or women-owned business status or any principal owner's ethnicity, race, or sex.

140 S. Ct. 1731 (2020).

86 FR 14363 (Mar. 16, 2021).

In addition, the Bureau's proposal includes data points that would be generated or supplied solely by the financial institution. These data points include, for all applications: A unique identifier for each application for or extension of credit; the application date; the application method (

i.e.,

the means by which the applicant submitted its application); the application recipient (that is, whether the financial institution or its affiliate received the application directly, or whether it was received by the financial institution via a third party); the action taken by the financial institution on the application; and the action taken date. For denied applications, there is also a data point for denial reasons. For applications that are originated or approved but not accepted, there is a data point for the amount originated or approved, and a data point for pricing information (which would include, as applicable, interest rate, total origination charges, broker fees, initial annual charges, additional cost for merchant cash advances or other sales-based financing, and prepayment penalties).

Firewall.

The Bureau's proposal includes a section to implement the requirement in section 1071 that certain data collected be shielded from underwriters and certain other persons; the Bureau refers to this as the “firewall.” An employee or officer of a financial institution or a financial institution's affiliate that is involved in making any determination concerning the application would be prohibited from accessing an applicant's responses to inquiries that the financial institution makes pursuant to section 1071 regarding whether the applicant is a minority-owned or women-owned business, and the ethnicity, race, and sex of the applicant's principal owners.

This prohibition would not apply to an employee or officer, however, if the financial institution determines that it is not feasible to limit that employee's or officer's access to an applicant's responses to the financial institution's inquiries regarding the applicant's protected demographic information, and the financial institution provides a notice to the applicant regarding that access. It would not be feasible to limit access if the financial institution determines that an employee or officer involved in making any determination concerning a covered application should have access to one or more applicants' responses to inquiries regarding protected demographic information. The notice must be provided to each applicant whose information will be accessed or, alternatively, the financial institution could provide the notice to all applicants whose information could be accessed. The Bureau is proposing sample language that a financial institution could use in providing this notice.

Reporting data to the Bureau; publication of data by the Bureau; and privacy considerations.

The Bureau is proposing to require that 1071 data be collected on a calendar year basis and reported to the Bureau on or before June 1 of the following year. Financial institutions reporting data to the Bureau would be required to provide certain identifying information about themselves as part of their submission. The Bureau is proposing to provide technical instructions for the submission of 1071 data in a

Filing Instructions Guide

and related materials.

The Bureau is proposing to make available to the public, on an annual basis and on the Bureau's website, the data submitted to it by financial institutions, subject to modifications or deletions made by the Bureau, at its discretion, to protect privacy interests. To determine whether and how the Bureau might use its discretion to modify or delete data prior to publication, the Bureau is proposing a “balancing test” that would assess the risks and benefits of public disclosure. After the Bureau receives at least one full year of 1071 data following the compliance date of the final rule, the Bureau plans to issue a policy statement in which it would set forth its intended modifications and deletions. The Bureau is also proposing that the Bureau's publication of the data would satisfy financial institutions' statutory obligation to make data available to the public upon request.

Recordkeeping, enforcement, severability, and effective and compliance dates.

The Bureau's proposal addresses issues related to recordkeeping and to severability of the rule. It also addresses enforcement of violations of the rule, along with provisions regarding bona fide errors

under the rule as well as several safe harbors.

Finally, the Bureau is proposing that its final rule to implement section 1071 would become effective 90 days after publication in the

Federal Register

, though compliance with the rule would not be required until approximately 18 months after publication in the

Federal Register

. The Bureau is also proposing several related transitional provisions that would permit covered financial institutions to begin collecting applicants' protected demographic information prior to the compliance date and would permit financial institutions to use a different time period to determine whether they will be covered by the rule as of the compliance date.

II. Background

As discussed above, in 2010, Congress enacted the Dodd-Frank Act. Section 1071 of the Dodd-Frank Act, which amended ECOA, requires financial institutions to collect and report to the Bureau data regarding applications for credit for women-owned, minority-owned, and small businesses. Section 1071 was adopted for the dual purposes of facilitating fair lending enforcement and enabling communities, governmental entities, and creditors to identify business and community development needs and opportunities of such businesses. Section 1071 complements other Federal efforts to ensure fair lending and to promote community development for small businesses, including through ECOA, the Community Reinvestment Act of 1977 (CRA),

and the Community Development Financial Institutions (CDFI) Fund.

12 U.S.C. 2901

et seq.

The Riegle Community Development Banking and Financial Institutions Act of 1994, 12 U.S.C. 4701

et seq.,

authorized the Community Development Financial Institution Fund (CDFI Fund). The CDFI Fund is discussed in more detail in part II.F.2.ii below.

The collection and subsequent publication of more robust and granular data regarding credit applications for small businesses, including those that are women- and minority-owned, will provide much-needed transparency to the small business lending market. The current COVID-19 pandemic has shown that transparency is essential, particularly at a time of crisis, when small businesses, especially those owned by women and minorities, may be in urgent need of credit in order to recover from economic shocks.

Furthermore, in the years and decades to come, the collection and publication of these data will be helpful in identifying potential fair lending violations and in facilitating the enforcement of anti-discrimination laws. It will also help governments, community groups, financial institutions, and other stakeholders to identify opportunities and gaps in the market, thereby enhancing business and community development and boosting broad-based economic activity and growth.

Overview

Small businesses are a cornerstone of the U.S. economy. There were over 30 million small businesses in the U.S. in 2017, employing almost half of all private sector employees.

Small businesses, particularly start-ups, also generated 65 percent of new jobs since 2000.

Small businesses were hit hard by two major shocks in the last two decades. First, the Great Recession, which began in 2007, disproportionately affected small businesses.

Between 2007 and 2009, employment at businesses with under 50 employees fell by 10.4 percent, compared with 7.5 percent at larger firms,

while between 2008 and 2011 lending to small firms fell by 18 percent, compared with 9 percent at larger firms.

Small businesses suffered again because of the COVID-19 pandemic. Around 40 percent of small businesses were temporarily closed in late March and early April 2020, due primarily to demand shocks and employee health concerns.

Across the first year of the pandemic, “excess” business establishment exits from the market, in comparison to exits over the same period from prior years, numbered up to 200,000.

As of mid-2021, loan approvals (other than for government emergency programs) still remained low, and some 845,000 non-farm private sector jobs had not yet been recovered.

Off. of Advocacy, Small Bus. Admin.,

2020 Small Business Profile

(May 2020),

https://cdn.advocacy.sba.gov/content/uploads/2020/06/04144214/2020-Small-Business-Economic-Profile-States-Territories.pdf

(estimating 31.7 million small businesses in the United States).

Off. of Advocacy, Small Bus. Admin.,

Frequently Asked Questions About Small Business,

at 1 (Oct. 2020),

https://cdn.advocacy.sba.gov/wp-content/uploads/2020/11/05122043/Small-Business-FAQ-2020.pdf

(SBA OA 2020 FAQs) (small businesses accounted for 65.1 percent of new jobs since 2000).

See generally

Congressional Research Serv.,

Small Business Administration and Job Creation

(updated June 23, 2021),

https://fas.org/sgp/crs/misc/R41523.pdf

(discussing small business job creation); Jon Haltiwanger et al.

, Who Creates Jobs? Small Versus Large Versus Young

, 95 Rev. Econ. Stat. 347, 347-48 (May 2013),

https://direct.mit.edu/rest/article/95/2/347/58100/Who-Creates-Jobs-Small-versus-Large-versus-Young

(finding that young firms, which are generally small, contribute disproportionately to both gross and net job creation).

Jason Dietrich

et al.,

Bureau of Consumer Fin. Prot.,

Data Point: Small Business Lending and the Great Recession,

at 9 (Jan. 23, 2020),

https://files.consumerfinance.gov/f/documents/cfpb_data-point_small-business-lending-great-recession.pdf

(finding that small business lending fell sharply during the Great Recession and recovered slowly, still not reaching pre-Recession levels by 2017).

Ayşegül Şahin

et al.,

Fed. Reserve Bank of N.Y., Current Issues in Economics & Finance,

Why Small Businesses Were Hit Harder by the Recent Recession,

at 1 (Vol. 17, No. 4, 2011),

https://www.newyorkfed.org////_issues/ci17-4.pdf

Rebel A. Cole, Off. of Advocacy, Small Bus. Admin,

How Did the Financial Crisis Affect Small Business Lending in the United States?,

at 2 (Nov. 2012),

https://www.microbiz.org/content/ploads//04/SmallBizLending-and-FiscalCrisis.pdf

Alexander W. Bartik

et al., The Impact of COVID-19 on Small Business Outcomes and Expectations,

117 Proc. Nat'l Acad. Sci. 17656, 17656 (July 2020),

https://www.pnas.org/content/pnas/117/30/17656.full.pdf

Leland D. Crane

et al.,

Bd. of Governors of the Fed. Reserve Sys., Finance and Economics Discussion Series, 2020-089,

Business Exit During the COVID-19 Pandemic: Non-Traditional Measures in Historical Context,

at 4 (2020),

https://www.federalreserve.gov/econres/feds/files/2020089r1pap.pdf

(estimating excess establishment exits and analyzing other estimates of small business exits during the pandemic). The paper defines “exit” as permanent shutdown and calculates “excess” exits by comparing the number of exits during the 12-month period from March 2020 to February 2021 with previous years.

Id.

at 2-4.

ADP Research Inst.,

ADP National Employment Report

(May 2021),

https://adpemploymentreport.com////May-2021.aspx

(non-farm private sector jobs as of June 2021 as compared to Feb. 2020); Biz2Credit,

Biz2Credit Small Business Lending Index Finds April 2021 Non-PPP Loan Approval Rates Move Little for All Types of Lenders

(Apr. 2021),

https://www.biz2credit.com/business-lending-index/april-2021

(approvals as of May 2021).

During the last two decades, the small business lending landscape has also transformed. Traditional providers—namely banks—consolidated, leading to branch closures. The number of banks in the U.S. has declined from over 18,000 in 1986 to under 5,200 today and the number of branches declined by 14 percent from 2009 to 2020.

Meanwhile, new providers and products, such as fintechs and merchant cash advances (MCAs), have become increasingly prevalent in the small business lending market. Financing by MCA providers is estimated to have increased from $8.6 billion in volume during 2014 to $15.3 billion in 2017.

From 2017 to 2019, the volume may

have increased further to $19 billion.

Meanwhile, financing by fintechs

is estimated to have increased from $1.4 billion

in outstanding balances in 2013 to approximately $25 billion

in 2019.

Congressional Research Serv.,

Small Business Credit Markets and Selected Policy Issues,

at 6 (Aug. 20, 2019),

https://fas.org/sgp//misc/R45878.pdf

(decline since 1986); Bruce C. Mitchell

et al.,

Nat'l Cmty. Reinvestment Coal.,

Relationships Matter: Small Business and Bank Branch Locations,

https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/

(last visited Aug. 24, 2021) (branch closures).

PYMNTS,

How Long Can MCAs Avoid the `Loan' Label?

(Jan. 20, 2016),

https://www.pymnts.com/in-depth/2016/how-long-can-mcas-avoid-the-loan-label/

Paul Sweeney,

Gold Rush: Merchant Cash Advances are Still Hot,

deBanked (Aug. 18, 2019),

https://debanked.com/2019/08/gold-rush-merchant-cash-advances-are-still-hot/

. Although the article does not specify one way or the other, estimates by the underlying source, Bryant Park Capital, appear to reference origination volumes rather than outstanding balances.

See

Nimayi Dixit, S&P Global Market Intelligence,

Payment Fintechs Leave Their Mark On Small Business Lending

(Aug. 28, 2018),

https://www.spglobal.com/marketintelligence/en/news-insights/research/payment-fintechs-leave-their-mark-on-small-business-lending

Depending on credit multiplier effects, the value of annual origination volumes could be smaller or greater than outstanding balances. Without information on outstanding balances and for the purposes of calculating a market size for small business financing in 2019, the Bureau assumes in this paper a 1:1 ratio between annual origination volumes and outstanding balances for MCA products. See part II.D below for discussion of credit multiplier effects and for market size calculations for MCA and other small business financing products in 2019.

Fintechs are defined as “technology companies providing alternatives to traditional banking services, most often exclusively in an online environment,” and may overlap in part with other categories of financial institution, such as commercial finance companies and/or providers of specialized products, including factoring and MCAs. Brett Barkley & Mark Schweitzer,

The Rise of Fintech Lending to Small Businesses: Businesses' Perspectives on Borrowing,

17 Int'l J. Cent. Banking 35, 35-36 (Mar. 2021),

https://www.ijcb.org/journal/ijcb21q1a2.pdf

Id. (citing

Katie Darden

et al.,

S&P Global Market Intelligence,

2018 US Fintech Market Report,

at 5,

https://www.spglobal.com/marketintelligence/en/documents/2018-us-fintech-market-report.pdf

(2018 US Fintech Market Report)). This figure annualizes $121 million in estimated 2013 quarterly originations to $484 million in annual originations and scales up to estimated outstanding balances using the ratio between the FFIEC Call Report and the CRA data discussed in part II.D below.

2018 US Fintech Market Report at 6. This figure scales up $9.3 billion in estimated 2019 credit originations for small to medium sized enterprise (SME) borrowers to outstanding balances

using the ratio methodology discussed in part II.D below.

Both recent economic shocks and changes in patterns of small business financing have had fair lending and community development implications. In terms of the effect of economic shocks, data suggest that women-owned and minority-owned small businesses were impacted disproportionately by the economic crises of the last two decades.

Data further suggest that women-owned and minority-owned small businesses, compared to other small businesses, had fewer cash reserves and faced steeper hurdles in accessing credit that would have allowed them to better weather these crises.

See

part II.E below.

Id.

Regarding trends in the small business financing landscape, the shift away from traditional providers of small business credit toward newer types of providers gives rise to both potential harm and opportunity. In terms of potential harms, bank closures may have made it more difficult for small businesses, particularly women-owned and minority-owned small businesses, to access credit and remain open—particularly in low- and moderate-income areas and rural communities. Newer providers, often offering newer products, have less experience complying with both Federal and State lending laws and regulations. Additionally, they may use algorithms and artificial intelligence (AI), which may create or heighten “risks of unlawful discrimination, unfair, deceptive, or abusive acts or practices . . . or privacy concerns.”

In addition, opaque product terms and high interest rates could trap business owners in cycles of debt.

86 FR 16837, 16839 (Mar. 31, 2021).

In terms of opportunity, innovative products and lending models, including the use of AI, may yield benefits of more accurate, lower-cost, and faster underwriting, as well as expanded credit access for small businesses that may not have obtained credit under traditional credit underwriting approaches.

Specifically, newer providers and approaches may permit those with low or nonexistent personal or business credit scores—including women and minorities who own or seek to start small businesses but on average have relatively lower personal credit scores than male and white business owners

—to more easily access credit.

Non-traditional credit providers may help offset decreases in lending associated with the closure of bank branches. For instance, fintechs may help provide financing to small businesses in rural communities that lack bank branches.

Id. See also

Patrice Ficklin

et al.,

Bureau of Consumer Fin. Prot.,

Innovation Spotlight: Providing Adverse Action Notices When Using AI/ML Models

(July 7, 2020),

https://www.consumerfinance.gov/about-us/blog/innovation-spotlight-providing-adverse-action-notices-when-using-ai-ml-models/

(discussing potential benefits and risks from financial institutions using AI in credit underwriting and other areas).

Geng Li, Bd. of Governors of the Fed. Reserve Sys.,

FEDS Notes: Gender-Related Differences in Credit Use and Credit Scores

(June 22, 2018),

https://www.federalreserve.gov/econres/notes/feds-notes/gender-related-differences-in-credit-use-and-credit-scores-20180622.htm

(finding that single women on average have lower credit scores than single men); Alicia Robb, Off. of Advocacy, Small Bus. Admin.,

Minority-Owned Employer Businesses and their Credit Market Experiences in 2017,

at 4 (July 22, 2020),

https://cdn.advocacy.sba.gov/wp-content/uploads/2020/07/22172533/Minority-Owned-Employer-Businesses-and-their-Credit-Market-Experiences-in-2017.pdf

(finding that Black and Hispanic small business borrowers are disproportionately denied credit or discouraged from applying for credit on the basis of their credit score).

See

Jessica Battisto

et al., Who Benefited from PPP Loans by Fintech Lenders?,

Liberty Street Economics (May 27, 2021),

https://libertystreeteconomics.newyorkfed.org/2021/05/who-received-ppp-loans-by-fintech-lenders.html

(showing that fintech lenders were an important source of credit for Black owners during the COVID-19 pandemic).

The precise impacts of these broader trends are not well understood at present because there are no comprehensive, comparable, and application-level data across the fragmented and complex small business lending market. Some small business lending data exist, provided mostly by Federal regulators, but available data are incomplete in certain ways. Some do not include lending by certain categories of institutions, such as smaller depository institutions. And none include lending by nondepository institutions, which comprises almost half of all small business financing.

The Bureau estimates that nondepository private business financing totaled approximately $550 billion out of around $1.2 trillion in total private outstanding balances in 2019 (47 percent). This $550 billion figure includes estimated financing by fintechs (around $25 billion), commercial finance companies (around $160 billion), nondepository CDFIs (around $1.5 billion), MCA providers (around $19 billion), factors (around $100 billion), equipment leasing providers (around $160 billion), nondepository mortgage lenders originating loans for 5+ unit residential developments (around $30 billion), and non-financial trade creditors (around $50 billion). There may additionally be lending by equipment and vehicle dealers originating loans in their own name that is not captured here. Public lenders include the Small Business Association (SBA), the Federal Housing Association (FHA), Fannie Mac and Freddie Mac, and the Farm Credit System (FCS), with public lending totaling around $210 billion in traditional lending programs plus $1 trillion in emergency COVID-19 SBA lending programs. See part II.D below for methodology and sources regarding market size estimates for each lending category.

The datasets that do exist both over- and underestimate small business lending in certain respects by including small dollar loans to non-small businesses and by excluding larger loans to small businesses.

Further, these datasets all concern originated loans; they do not include information on applications that do not result in originated loans. Nor do they generally include borrower demographics. Other public, private, and nonprofit datasets offer only partial snapshots of particular areas of the market. Finally, much of the publicly available data are aggregated, which does not permit more granular, loan- or application-level analysis that

would facilitate fair lending or business and community development analysis by stakeholders other than those that collected the data. See part II.B below for a detailed discussion on existing data on small business financing.

See

part II.B below.

The remainder of this part II focuses on several broad topics that explain, in more detail, the need for the small business lending data that the proposed rule to implement section 1071 would provide: (A) The role of small businesses in the U.S. economy; (B) existing data on small business financing; (C) the landscape of small business financing; (D) estimating the size of the small business financing market despite limited data; (E) the particular challenges faced by women-owned and minority-owned small businesses; and (F) the purposes and impact of section 1071.

A. Small Businesses in the United States

Small businesses are an important, dynamic, and widely diverse part of the U.S. economy. They are critical to employment, innovation, and economic growth and stability, both overall and specifically for minority and women entrepreneurs.

The Small Business Act, as implemented by the SBA, defines a small business using size standards that generally hinge on the average number of employees or average annual receipts of the business concern and are customized industry by industry across 1,057 6-digit North American Industry Classification System (NAICS) codes.

Size standards based on average number of employees are used in all industries in the manufacturing and wholesale trade sectors, as well as in certain industries across a variety of other sectors as well. Employee-based size standards range from 100 (used almost entirely in certain industries within the wholesale trade sector) to 1,000 (used in industries across a variety of sectors including, for example, petroleum refineries, automobile manufacturing, and greeting card publishers).

Size standards based on average annual receipts are used in nearly all other industries, and range from $1 million (used in most industries in the crop production and animal production and aquaculture subsectors) to $41.5 million (used in industries across a variety of sectors including, for example, passenger car leasing, television broadcasting, and general medical and surgical hospitals).

See

Small Bus. Admin.,

Table of Small Business Size Standards Matched to North American Industry Classification System Codes

(effective Aug. 19, 2019),

https://www.sba.gov/sites/default/files/2019-08/SBA%20%20%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf

See id.

A small number of industries use a size standard based on a metric other than average annual receipts or average number of employees. For example, the commercial banking industry (NAICS 522110) is subject to an asset-based size standard.

See id.

Simpler definitions of what constitutes a small business are used in certain contexts. For example, in certain annual research releases the SBA's Office of Advocacy defines a small business as one that has fewer than 500 employees.

According to the Office of Advocacy, and based on this definition of a small business, there are 31.7 million such businesses in the U.S. that represent 99.9 percent of all U.S. firms and employ over 60 million Americans.

Six million of these small businesses have paid employees, while 25.7 million are non-employer businesses (

i.e.,

the owner(s) are the only people involved in the business).

From 2000 to 2019, small businesses, particularly young businesses and start-ups, created 10.5 million net new jobs in the U.S., while large businesses created 5.6 million.

See

SBA OA 2020 FAQs at 1.

See id.

See id.; see also

Haltiwanger et al.

, 95 Rev. Econ. Stat. at 347-48 (finding that young firms, which are generally small, contribute disproportionately to both gross and net job creation).

Nearly one third of all businesses are minority-owned and more than one third are women-owned, though minorities and women own a smaller share of employer firms. As of 2018, minorities owned over one million employer firms in the U.S. (amounting to 18.3 percent of all employer firms)

and, as of 2017, approximately 8.2 million non-employer firms.

Likewise, as of 2018, women owned about 1.1 million employer firms (19.9 percent of all employer firms)

and, as of 2017, approximately 10.6 million non-employer firms.

See

Press Release, U.S. Census Bureau,

Annual Business Survey Release Provides Data on Minority-Owned, Veteran-Owned and Women-Owned Businesses

(Jan. 28, 2021),

https://www.census.gov/newsroom/press-releases//business-survey.html

Minority Bus. Dev. Agency, U.S. Dep't of Com.,

The Number of Minority Nonemployer Firms Grew by Nearly 17% between 2014 and 2017

(Dec. 18, 2020),

https://www.mbda.gov/news/press-releases/2020/12/the-number-of-minority-nonemployer

(stating that the nearly 8.2 million minority non-employer firms in the U.S. generated $279.3 billion in revenues in 2017, and grew in number at four times the rate of non-minority non-employer firms between 2014 and 2017).

See also

SBA OA 2020 FAQs at 3 (showing over 7.6 million minority-owned non-employer firms as of 2016).

See

Press Release, U.S. Census Bureau,

Annual Business Survey Release Provides Data on Minority-Owned, Veteran-Owned and Women-Owned Businesses

(Jan. 28, 2021),

https://www.census.gov/newsroom/press-releases//business-survey.html

See

Press Release, Nat'l Women's Bus. Council,

NWBC Shares 2017 Nonemployer Statistics by Demographics Estimates for Women-Owned Businesses

(Dec. 17, 2020),

https://www.nwbc.gov/2020/12/17/nwbc-shares-2017-nonemployer-statistics-by-demographics-estimates-for-women-owned-businesses/

(also stating that these 10.6 million non-employer firms generate $286.1 billion in revenue, and that nearly half of all women-owned non-employer firms generate less than $10,000 in annual receipts, while only 0.05 percent generate $1 million or more in revenue).

Businesses are legally structured in several ways. In 2017, 87 percent of non-employer businesses were sole proprietorships, which means that the business is not distinguishable from the owner for tax and legal purposes; the owner receives profits directly but is also legally responsible for the business's obligations.

Seven percent of non-employer businesses were partnerships, which can be structured to limit the personal liability of some or all owners; limited partners may exchange control for limited liability, while general partners that run the business may remain personally liable.

Six percent of non-employer businesses were structured as corporations—4.6 percent are S-corporations and 1.5 percent are C-corporations—which are independent legal entities owned by shareholders who are not personally liable for the corporation's obligations.

In 2017, most small employer businesses were corporations, with 50.5 percent choosing to be S-corporations and 16.8 percent preferring C-corporation status, although sole proprietorship and partnership structures remained relatively popular at 12.9 percent and 11.8 percent respectively. By contrast, 74.2 percent of large employer businesses chose to be C-corporations, with 9.3 percent preferring a partnership structure and 8.1 percent S-corporation status.

See

SBA OA 2020 FAQs at 3.

Id.

at 4.

Id.

Small businesses are particularly important in specific sectors of the economy. In 2016, in the services sector, small businesses supplied 45 percent of 19.7 million healthcare and social services jobs, over 60 percent of 13.7 million accommodation and food services jobs, and over 80 percent of 6.3 million construction jobs.

In the same year, in manufacturing, small businesses made up 44 percent out of 11.6 million

jobs.

Finally, in 2016, small family farms totaled 96 percent out of 2.2 million farms,

and small businesses provided over 80 percent of agriculture, forestry, and fishing and hunting jobs out of 161,000.

As such, the financial health of small businesses is essential to the U.S. economy, especially to the supply of critical and basic goods and services—from producing food to serving it at restaurants, and from home building to healthcare.

See

Off. of Advocacy, Small Bus. Admin.,

2019 Small Business Profile

(Apr. 2019),

https://cdn.advocacy.sba.gov/wp-content/uploads/2019/04/23142719/2019-Small-Business-Profiles-US.pdf

(2019 Small Business Profile).

Id.

at 3.

Nat'l Inst. of Food & Agric., U.S. Dep't of Agric.,

Family Farms,

https://nifa.usda.gov/family-farms

(last visited July 26, 2021)

(classifying family farms as any farm organized as a sole proprietorship, partnership, or family corporation. Family farms exclude farms organized as non-family corporations or cooperatives, as well as farms with hired managers.).

2019 Small Business Profile at 3

Small businesses have been especially hard-hit by the COVID-19 pandemic. At a low point in the pandemic in April 2020, 20 percent of self-employed workers had temporarily exited the labor market.

Industries in which small businesses played a large role have been particularly impacted. For example, comparing April 2020 with April 2019, employment declined by almost 50 percent in the leisure and hospitality industries (also declining by 50 percent among food services and drinking establishments within the leisure and hospitality industry), in which small businesses employ 60 percent of workers.

Daniel Wilmoth, Off. of Advocacy, Small Bus. Admin.,

The Effects of the COVID-19 Pandemic on Small Businesses

(Issue Brief No. 16) (Mar. 2021),

https://cdn.advocacy.sba.gov/wp-content/uploads/2021/03/02112318/COVID-19-Impact-On-Small-Business.pdf

Id. By August 2021, many of these jobs had since returned as mandatory closure orders ended and the economy began to recover.

B. Existing Data on Small Business Lending

While small businesses are a critical part of the U.S. economy and require financial support, it is still true, as it was in 2017 when the Bureau published its White Paper on small business lending, that it is not possible with current data to confidently answer basic questions regarding the state of small business lending. This limitation is especially the case with regard to the race, sex, and ethnicity of small business owners, applications as opposed to originations, and for small business financing products that are not currently reported in Call Report data.

Bureau of Consumer Fin. Prot.,

Key dimensions of the small business lending landscape,

at 39-40 (May 2017),

https://files.consumerfinance.gov/f/documents/201705_cfpb_Key-Dimensions-Small-Business-Lending-Landscape.pdf

(White Paper).

Data on small business lending are fragmented, incomplete, and not standardized, making it difficult to conduct meaningful comparisons across products and over time. This hinders attempts by policymakers and other stakeholders to understand the size, shape, and dynamics of the small business lending marketplace, including the interaction of supply and demand, as well as potentially problematic lending practices, gaps in the market, or trends in funding that may be holding back some communities.

For example, absent better data, it is hard to determine if relatively lower levels of bank loans to small businesses in the decade before the pandemic began were reflective of a net relative decline in lending to small businesses as compared to large businesses or rather a shift within small business lending from banks to alternative lenders.

To the extent there may have been a relative decline, it is difficult to assess if that decline affected certain types of small businesses more than others, including women-owned and minority-owned small businesses.

While Call Report and CRA data provide some indication of the level of supply of small business credit, the lack of data on small business credit applications makes demand for credit by small businesses more difficult to assess, including with respect to local markets or protected classes.

Rebel A. Cole, Off. of Advocacy, Small Bus. Admin.,

How Did Bank Lending to Small Business in the United States Fare After the Financial Crisis?,

at 26 (Jan. 2018),

https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf

(showing a decline in bank loans to small businesses from 2008 to 2015 from $710 billion to $600 billion). The level of bank lending to small businesses has recovered somewhat since a trough in 2012-13 that represented the lowest amount of lending since 2005. Fed. Deposit Ins. Corp.,

https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx

(last visited July 22, 2021).

White Paper at 40.

The primary sources of information on lending by depository institutions are the Federal Financial Institutions Examination Council (FFIEC) and National Credit Union Administration (NCUA) Consolidated Reports of Condition and Income (Call Reports), as well as reporting under the CRA. Under the FFIEC and CRA reporting regimes, small loans to businesses of any size are used in whole or in part as a proxy for loans to small businesses. The FFIEC Call Report captures banks' outstanding number and amount of small loans to businesses (that is, loans originated under $1 million to businesses of any size; small loans to farms are those originated under $500,000).

The CRA requires banks and savings associations with assets over a specified threshold to report loans in original amounts of $1 million or less to businesses; reporters are asked to indicate whether the borrower's gross annual revenue is $1 million or less, if they have that information.

The NCUA Call Report captures data on all loans over $50,000 to members for commercial purposes, regardless of any indicator about the business's size.

There are no similar sources of information about lending to small businesses by nondepository institutions. The SBA also releases data concerning its loan programs, but these typically do not include demographic information, and this covers only a small portion of the overall small business financing market.

See

Fed. Fin. Insts. Examination Council,

Reporting Forms 31, 41, and 51

(last modified Mar. 16, 2021),

https://www.ffiec.gov/ffiec_report_forms.htm

(FFIEC Call Report).

See

Fed. Fin. Insts. Examination Council,

A Guide to CRA Data Collection and Reporting,

at 11, 13 (2015),

https://www.ffiec.gov/cra/pdf/2015_CRA_Guide.pdf

(2015 FFIEC CRA Guide). Small business loans are defined for CRA purposes as loans whose original amounts are $1 million or less and that were reported on the institution's Call Report or Thrift Financial Report as either “Loans secured by nonfarm or nonresidential real estate” or “Commercial and industrial loans.” Small farm loans are defined for CRA purposes as loans whose original amounts are $500,000 or less and were reported as either “Loans to finance agricultural production and other loans to farmers” or “Loans secured by farmland.”

Id.

at 11. Beginning in 2023, national banks supervised by the OCC with assets greater than $2.5 billion will be required to report loans of $1.6 million or less and indicate whether the borrower's gross annual review is $1.6 million or less.

See

85 FR 34734 (June 5, 2020).

See

Nat'l Credit Union Admin.,

Call Report Form 5300

(June 2020),

https://www.ncua.gov/files/publications/regulations/form-5300-june-2020.pdf

These public data sources provide some of the most extensive information currently available on small business lending. However, they suffer from four material limitations, namely that the data capture only parts of the market, are published at a high level of aggregation, do not permit detailed analysis across the markets, and lack standardization across different agencies.

First, these datasets exclude entire categories of lenders. For example, banks under $1.322 billion in assets do not have to report under the CRA.

The FFIEC and NCUA Call Reports and CRA data do not include lending by nondepository financial institutions, which the Bureau estimates to represent 40 percent of the small business financing market and is rapidly growing.

Fed. Fin. Insts. Examination Council,

Community Reinvestment Act 2021 Reporting Criteria,

https://www.ffiec.gov/cra/reporter21.htm

(last visited Aug. 5, 2021).

Nondepository lending is estimated to total approximately $550 billion out of $1.4 trillion in total lending, excluding $1 trillion in COVID-19 emergency program lending.

See

part II.D below

(providing a detailed breakdown and methodology of estimates across lending products).

Second, Federal agencies publish summary data at a high level in a manner that does not facilitate independent analysis by other agencies or stakeholders. The FFIEC and NCUA Call Reports and the CRA data are all available at a higher level of aggregation than loan-level, limiting fair lending and detailed geographic analyses since race, sex, and ethnicity as well as business location data are rarely disclosed.

Third, the detailed data collected by these Federal sources have significant limitations as well, preventing any analysis into certain issues or types of borrowers, even by the regulators possessing these data. Neither Call Report nor CRA data include applications, which limits insights into any potential discrimination or discouragement in application processes as well as into the interaction between credit supply and demand. The Call Report and CRA data separately identify loans of under $1 million in value, and CRA data also identify loans to businesses with annual revenues of $1 million or less.

However, the Call Report definition of small business loans as those with a loan size of $1 million or less at origination is both overinclusive, as it counts small loans to businesses of all sizes, and underinclusive, as it excludes loans over $1 million made to small businesses. Credit unions report any loans under $50,000 as consumer loans and not as commercial loans,

potentially excluding from measurement an important source of funding for many small businesses, particularly the smallest and often most underserved.

Fed. Fin. Insts. Examination Council,

Schedule RC-C, Part II Loans to Small Businesses and Farms,

at 1,

https://www.fdic.gov/regulations/resources/call/crinst-031-041/2017/2017-03-rc-c2.pdf

(detailing the Call Report loan size threshold of $1 million at origination for loans to small businesses); 2015 FFIEC CRA Guide at 11 (detailing the CRA size thresholds of $1 million both for loan amount at origination and for revenue of small business borrowers).

Nat'l Credit Union Admin.,

Call Report Form 5300 Instructions,

at 26 (effective Mar. 31, 2021),

https://www.ncua.gov/files/publications/regulations/call-report-instructions-march-2021.pdf

Finally, the Federal sources of small business lending data are not standardized across agencies and cannot be easily compared. For example, the FFIEC Call Report collects small loans to businesses as a proxy for small business lending, whereas the NCUA Call Report collects loans to members for commercial purposes above $50,000 but with no upper limit. The loan-level data for the Paycheck Protection Program (PPP) offer an unprecedented level of insight into small business lending, but this dataset is a one-off snapshot into the market for a specific lending program at an acute moment of crisis and is also limited in utility by relatively low response levels to demographic questions concerning borrowers.

Zachary Warmbrodt,

Tracking the Money: Bid to Make Business Rescue More Inclusive Undercut by Lack of Data,

Politico (Mar. 2, 2021),

https://www.politico.com/news/2021/03/02/businesses-inclusive-coronavirus-relief-money-data-472539

(reporting that 75 percent of PPP recipients did not report their ethnicity and 58 percent did not reveal their gender).

The Federal government also conducts and releases a variety of statistics, surveys, and research reports on small business lending through the member banks for the Federal Reserve System, the FDIC, CDFI Fund, and the U.S. Census Bureau. These data sources offer insights into broad trends and specific small business lending issues but are less useful for detailed fair lending analyses or identification of specific areas, industries, or demographic groups being underserved. Periodic changes in survey methodology and questions can also limit comparability and the ability to track developments over time.

There are also a variety of non-governmental data sources, issued by both private and nonprofit entities, that cover small businesses and/or the small business financing market. These include datasets and surveys published by commercial data and analytics firms, credit reporting agencies, trade associations, community groups, and academic institutions. Certain of these data sources are publicly available and track specific topics, such as small business optimism,

small business employment,

rates of small business credit application approvals,

small business lending and delinquency levels,

and rates of small business closure.

Other databases have more granularity and provide detailed information on individual businesses, including revenue, credit utilization, industry, and location.

Nat'l Fed'n of Indep. Bus.,

Small Business Optimism Index

(June 2021),

https://www.nfib.com/surveys/small-business-economic-trends/

ADP,

Employment Reports,

https://adpemploymentreport.com/

(last visited July 22, 2021).

Biz2Credit,

Biz2Credit Small Business Lending Index,

https://www.biz2credit.com/small-business-lending-index

(last visited July 27, 2021).

PayNet,

Small Business Lending Index,

https://sbinsights.paynetonline.com/lending-activity/

(last visited July 27, 2021).

Opportunity Insights Economic Tracker,

https://tracktherecovery.org/

(last visited July 27, 2021). The Opportunity Insights Economic Tracker and similar data sources may materially overestimate the number of business closures by not controlling for attrition in the small business client base of data providers.

See

Leland D. Crane

et al.,

Bd. of Governors of the Fed. Reserve Sys., Finance and Economics Discussion Series, 2020-089,

Business Exit During the COVID-19 Pandemic: Non-Traditional Measures in Historical Context,

at 21-22 (2020),

https://www.federalreserve.gov/econrest/feds/files2020089r1pap.pdf

See, e.g.,

Dun & Bradstreet,

https://www.dnb.com/

(data provider and credit reporter); Data Axle,

https://www.data-axle.com/

(data provider); Equifax,

https://www.equifax.com/business/business-credit-reports/

(credit reporter); Experian,

https://www.experian.com/small-business/business-credit-reports

(credit reporter).

While these non-public sources of data on small businesses may provide a useful supplement to existing Federal sources of small business lending data, these private and nonprofit sources often do not have lending information, may rely in places on unverified research based on public internet sources, and/or narrowly limit use cases for parties accessing data. Further, commercial datasets are generally not free to public users and can be costly, raising equity issues for stakeholders who cannot afford access.

C. The Landscape of Small Business Finance

Notwithstanding the lack of data on the market, it is clear that financing plays an important role in enabling small businesses to grow and contribute to the economy. When it is available, financing not only provides resources for small businesses to smooth cash flows for current operations, but also affords business owners the opportunity to invest in business growth. An analysis by the National Small Business Association, which examined data from 1993 through 2016, found a correlation between small business owners' ability to access credit and their ability to hire.

This same study found that, while not the sole cause, the inability to secure financing may have led 16 percent of small businesses to reduce their number of employees and approximately 10 percent of small businesses to reduce employee benefits. Lack of access to financing also contributed to a further 10 percent of small businesses being unable to increase store inventory in order to meet existing demand.

Nat'l Small Bus. Ass'n,

2016 Year-End Economic Report

(July 2017),

https://www.nsba.biz/wp-content/uploads/2017/02/Year-End-Economic-Report-2016.pdf

Id.

To support their growth or to make it through harder times, small businesses look to a variety of funding sources. Especially when starting out, entrepreneurs often rely on their own

savings and help from family and friends. If a business generates a profit, its owners may decide to reinvest retained earnings to fund further growth. However, for many aspiring business owners—and their personal networks—savings and retained earnings may not be sufficient to fund a new venture or grow it, leading owners to seek other sources of funding. This is particularly true for minority- and women-led households, which on average have less wealth than their white- and men-led counterparts.

Emily Moss

et al., The Black-White Wealth Gap Left Black Households More Vulnerable,

Brookings Inst. (Dec. 8, 2020),

https://www.brookings.edu/blog/up-front/2020/12/08/the-black-white-wealth-gap-left-black-households-more-vulnerable/

(detailing wealth gaps in 2019 by race and sex that show white male households with more wealth than white female or Black male or female households at all age brackets).

See also

Erin Ruel & Robert Hauser,

Explaining the Gender Wealth Gap,

50 Demography 1155, 1165 (Dec. 2012),

https://read.dukeupress.edu/demography/article/50/4/1155/169553/Explaining-the-Gender-Wealth-Gap

(finding a gender wealth gap of over $100,000 in a longitudinal study over 50 years of a single age cohort in Wisconsin); Neil Bhutta

et al.,

Bd. of Governors of the Fed. Reserve Sys.,

Disparities in Wealth by Race and Ethnicity in the 2019 Survey of Consumer Finances

(Sept. 28, 2020),

https://www.federalreserve.gov/econres/notes/feds-notes/disparities-in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-consumer-finances-20200928.htm

(finding median white family wealth in 2019 of $188,200 compared with $24,100 for Black families and $36,100 for Hispanic families).

One such source of funding comes from others besides family and friends, whether high net worth individuals or “angel investors,” venture capital funds, or, in a more recent development usually facilitated by online platforms, via crowdsourcing from retail investors. Often, these early investments take the form of equity funding, which business owners are not obligated to repay to investors. However, equity funding requires giving up some ownership and control to investors, which certain entrepreneurs may not wish to do. For small businesses, equity funding also tends to be somewhat more expensive than debt financing in the longer run. This is for a number of reasons, including that loan interest payments, unlike capital gains, are tax-deductible.

Finally, equity investments from others besides family and friends are available to only a minority of small businesses.

Jim Woodruff,

The Advantages and Disadvantages of Debt and Equity Financing,

CHRON (updated Mar. 4, 2019),

https://smallbusiness.chron.com/advantages-disadvantages-debt-equity-financing-55504.html

Many small businesses instead seek debt financing from a wide range of providers. These providers include depository institutions, such as banks, savings associations, and credit unions,

as well as fintechs and commercial finance companies, specialized providers of specific financing products, and a range of government and government-sponsored enterprises, among others.

For purposes of this notice of proposed rulemaking, the Bureau is using the term depository institution to mean any bank or savings association defined by section 3(c)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(c)(1), or credit union defined pursuant to the Federal Credit Union Act, as implemented by 12 CFR 700.2. The Bureau notes that the Dodd-Frank Act defines a depository institution to mean any bank or savings association defined by the Federal Deposit Insurance Act; there, that term does not encompass credit unions. 12 U.S.C. 5301(18)(A), 1813(c)(1). The Bureau is referring to banks and savings associations together with credit unions as depository institutions throughout this notice, unless otherwise specified, to facilitate analysis and discussion.

In the past, small businesses principally sought credit from banks; however, as banks have merged and consolidated, particularly in the wake of the Great Recession, they have provided less financing to small businesses.

As noted earlier, the number of banks has declined significantly since a post-Great Depression peak in 1986 of over 18,000 institutions to around 5,200 institutions today,

while 13,500 branches closed from 2009 to mid-2020, representing a 14 percent decrease.

Although nearly half of counties either gained bank branches or retained the same number between 2012 and 2017, the majority lost branches over this period.

Out of 44 counties that were deeply affected by branch closures, defined as having 10 or fewer branches in 2012 and seeing five or more of those close by 2017, 39 were rural counties.

Of rural counties, just over 40 percent lost bank branches in that period; the rural counties that experienced substantial declines in bank branches tend to be lower-income and with a higher proportion of African-American residents relative to other rural counties,

raising concerns about equal access to credit.

Rebel A. Cole, Off. of Advocacy, Small Bus. Admin.,

How Did Bank Lending to Small Business in the United States Fare After the Financial Crisis?,

at 26 (Jan. 2018),

https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf

https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx

(last visited July 22, 2021).

Congressional Research Serv.,

Small Business Credit Markets and Selected Policy Issues,

at 6 (Aug. 20, 2019),

https://fas.org/sgp/crs/misc/R45878.pdf

Bruce C. Mitchell

et al.,

Nat'l Cmty. Reinvestment Coal.,

Relationships Matter: Small Business and Bank Branch Locations,

at 6 (2020),

https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/

(stating that in 2009 there were 95,596 brick and mortar full-service branches or retail locations but, as of June 30, 2020, that number had fallen to 82,086).

Bd. of Governors of the Fed. Reserve Sys.,

Perspectives from Main Street: Bank Branch Access in Rural Communities,

at 1, 3-4, 19 (Nov. 2019),

https://www.federalreserve.gov/publications/files/bank-branch-access-in-rural-communities.pdf

Id.

As banks and branches have merged and/or closed, the share of banking assets has also become increasingly concentrated in the largest institutions, with banks of over $10 billion in assets representing 84 percent of all industry assets in 2018,

totaling $15.1 out of $17.9 trillion.

Nevertheless, banks of under $10 billion in assets continue to hold approximately half of all small business loans (using the FFIEC Call Report definition of loans of under $1 million), highlighting the importance of smaller banks to the small business lending market.

Since smaller bank credit approvals have traditionally been close to 50 percent, while large banks approve only 25-30 percent of applications, bank consolidation may have implications for small business credit access.

Since institutions under $1.322 billion in assets are not required to report on lending under the CRA,

it is difficult to precisely assess the

impact of bank consolidation and shuttered branches on small business lending and access to credit in local areas.

By contrast, credit unions increased their small business lending from $30 billion in 2008 to at least $55 billion in 2019.

Like banks, credit unions typically receive high satisfaction scores among small business borrowers, reflecting more high-contact, relationship-based lending models.

Congressional Research Serv.,

Small Business Credit Markets and Selected Policy Issues,

at 6 (Aug. 20, 2019),

https://fas.org/sgp/crs/misc/R45878.pdf.

Fed. Deposit Ins. Corp.,

Bank Data and Statistics,

https://www.fdic.gov/bank/statistical/

(last visited Aug. 22, 2021).

Speech by Board Governor Lael Brainard:

Community Banks, Small Business Credit, and Online Lending

(Sept. 30, 2015),

https://www.federalreserve.gov/newsevents/speech/brainard20150930a.htm

. Banks with under $10 billion in assets are often referred to as “community banks.” Congressional Research Serv.,

Over the Line: Asset Thresholds in Bank Regulation,

at 2-3 (May 3, 2021),

https://fas.org/sgp/crs/misc/R46779.pdf

(noting that the Board of Governors of the Federal Reserve System (Board) and the Office of the Comptroller of the Currency (OCC) define community banks as having under $10 billion in assets, although there may be other criteria, with the FDIC considering also geographic footprint and a relative emphasis on making loans and taking deposits as opposed to engaging in securities and derivatives trading). Community banks are also more likely to engage in relationship-based lending.

See id.

at 3.

Biz2Credit,

Biz2Credit Small Business Lending Index,

https://www.biz2credit.com/small-business-lending-index

(last visited July 22, 2021). These historical approval rates are reflected in pre-pandemic Small Business Lending Index releases by Biz2Credit.

See, e.g.,

Biz2Credit,

Small Business Loan Approval Rates at Big Banks Remain at Record High in February 2020: Biz2Credit Small Business Lending Index,

https://www.biz2credit.com/small-business-lending-index/february-2020

(last visited July 29, 2021) (showing large bank approvals of 28.3 percent in February 2020 and of 27.2 percent in February 2019 and smaller bank approvals of 50.3 percent in February 2020 and of 48.6 percent in February 2019).

See

part II.B above.

Bruce C. Mitchell

et al.,

Nat'l Cmty. Reinvestment Coal.,

Relationships Matter: Small Business and Bank Branch Locations,

https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/

(last visited July 27, 2021).

Rebel A. Cole, Off. of Advocacy, Small Bus. Admin.,

How Did Bank Lending to Small Business in the United States Fare After the Financial Crisis?,

at 26 (Jan. 2018),

https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf

Fed. Reserve Banks,

Small Business Credit Survey, 2021 Report On Employer Firms

(2021),

https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2021/2021-sbcs-employer-firms-report

Certain banks and credit unions choose to be mission-based lenders, as CDFIs or Minority Depository Institutions (MDIs).

Mission-based lenders focus on providing credit to traditionally underserved and low-income communities and individuals to promote community development and expand economic opportunity, making them a relatively smaller by dollar value but essential part of the small business lending market. There were over 1,200 CDFIs (around half of which are depository institutions) as of May 2021 and over 140 MDIs as of March 2021.

According to the FDIC, FDIC-insured MDIs and CDFI banks are banks, savings banks, and savings associations (collectively, banks) that serve minority, low- or moderate-income (LMI), and rural communities at higher rates than mainstream banks. MDIs serve minority communities including African American, Asian American, Hispanic American, and Native American. CDFI banks are certified through the U.S. Department of the Treasury by demonstrating they serve LMI communities.

See, e.g.,

Fed. Deposit Ins. Corp. Minority Depository Institutions Program website,

https://www.fdic.gov/regulations/resources/minority/mission-driven/index.html

(last visited July 11, 2021).

Cmty. Dev. Fin. Inst.,

CDFI Certification,

https://www.cdfifund.gov/programs-training/certification/cdfi

(last visited July 21, 2021); Fed. Deposit Ins. Corp.,

Minority Depository Institutions Program

(last updated June 9, 2021),

https://www.fdic.gov/regulations/resources/minority/mdi.html

During a period in which that depository institutions have been providing relatively less funding to small businesses,

small businesses have increasingly relied on other nondepository institutions for financing. Since nondepositories typically do not report their small business financing activities to regulators, however, there are no authoritative sources for either the number of such entities or the dollar value of financing they provide to small businesses.

However, what data are available make clear that fintech firms are rapidly increasing their share of the small business financing market.

See

Rebel A. Cole, Off. of Advocacy, Small Bus. Admin.,

How Did Bank Lending to Small Business in the United States Fare After the Financial Crisis?,

at 26 (Jan. 2018),

https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf

(showing a decline in bank loans to small businesses from 2008-15 from $710 billion to $600 billion). The level of bank lending to small businesses has recovered somewhat since a trough in 2012-13 that represented the lowest amount of lending since 2005.

See also

Fed. Deposit Ins. Corp.,

https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx

(last visited July 21, 2021) (tabulating outstanding balances for credit extended to small- and non-small business lending by banks and thrifts over time).

See

part II.B above.

See

part II.D below.

Whether depository or nondepository, each provider of small business financing assesses a variety of different criteria to determine whether and on what terms to grant an extension of credit or other financing product, including business and financial performance, the credit history of the business and its owner(s), the time in business, and the industry, among other factors. Protections such as guarantees, collateral, and insurance can mitigate perceived risks, potentially enabling a lender to offer better terms or facilitating an extension of credit that would otherwise not meet lending limit or underwriting criteria. Often, government agencies, including the SBA, FHA, and USDA, guarantee or insure loans themselves to encourage lenders to provide credit to borrowers that may not otherwise be able to obtain credit, either on affordable terms and conditions or at all.

Different lenders also employ diverse methods for assessing risk, with smaller banks generally relying more on traditional underwriting methods and typically managing multi-product relationships. Fintechs increasingly use algorithms, automation, and even AI and machine learning to assess risk and make underwriting decisions, with originations typically being less relationship-based in nature.

Congressional Research Serv.,

Small Business Administration 7(a) Loan Guaranty Program

(updated June 21, 2021),

https://fas.org/sgp/crs/misc/R41146.pdf

(discussing the SBA's flagship 7(a) loan guarantee program); U.S. Dep't of Hous. & Urban Dev.,

Descriptions Of Multifamily Programs,

https://www.hud.gov/program_offices/housing/mfh/progdesc

(last visited July 27, 2021) (listing FHA mortgage insurance programs for 5+ unit residential developments); Farm Serv. Agency, U.S. Dep't of Agric.,

Guaranteed Loan Program Fact Sheet

(Mar. 2020),

https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/guaranteed_loan_program-factsheet.pdf

(discussing the USDA's Farm Service Agency guaranteed loan program).

As well as diversity in underwriting methodology and criteria, there are also considerable differences across small business financing products and providers with respect to pricing methods and repayment structures. As a result, it can be challenging to compare the competitiveness of product pricing and terms. The Bureau understands that term loans, lines of credit, and credit cards typically disclose annualized interest rates; leases often take into account depreciation; factoring products discount an invoice's value and add a fee; and MCAs apply a multiple to the value of the up-front payment.

Moreover, providers may add additional fees that are not standardized within industries, much less across them. The Bureau believes that this complexity may confuse business owners and render them unable to secure more favorable rates due to opacity in offers presented—which in some cases may even be deliberate

100

—and a corresponding inability to effectively compare across different financing options.

101

This may impair applicants' ability to make informed choices.

See part II.D below for definitions of the different product categories.

100

Press Release, Fed. Trade Comm'n,

Cash Advance Firm to Pay $9.8M to Settle FTC Complaint It Overcharged Small Businesses

(Apr. 22, 2021),

https://www.ftc.gov/news-events/press-releases/2021/04/cash-advance-firm-pay-98m-settle-ftc-complaint-it-overcharged

(settling a lawsuit between the Federal Trade Commission (FTC) and an MCA provider for $9.8 million where the complaint alleged that the provider “deceived” and “misle[d]” business borrowers about the amount and terms of financing); Bd. of Governors of the Fed. Reserve Sys.,

Record of Meeting: Community Advisory Council and the Board of Governors,

at 7 (Oct. 5, 2018),

https://www.federalreserve.gov/aboutthefed/files/cac-20181005.pdf

(noting a growing trend of small business owners facing difficulty with expensive loan products such as MCAs where the pricing and structure of the loans is often deliberately obscured).

101

Fed. Trade Comm'n,

`Strictly Business' Forum, Staff Perspective,

at 5 (Feb. 2020),

https://www.ftc.gov/system/files/documents/reports/staff-perspective-paper-ftcs-strictly-business-forum/strictly_business_forum_staff_perspective.pdf

(discussing the difficulty in comparing across financing products with widely differing methods for calculating and describing key features).

D. Estimating the Size and Scope of the Small Business Financing Market

In light of the lack of data and the heterogeneity of products and providers within the small business financing market, it can be difficult to get a clear sense of the size and scope of the market. In this section, the Bureau describes its estimates of the total outstanding balances of credit in the market, the number of institutions that are active in the small business

financing market, and how the Bureau arrived at these estimates. Where possible, the Bureau tries to estimate the state of the small business financing market at the end of 2019 in order to estimate the state of the market during a year unaffected by the COVID-19 pandemic.

One challenge is that some of the data report the dollar value of originations and some report outstanding balances. For the purposes of this exercise and for most, but not all, products, the Bureau assumes that for every $1 originated in the market in a given year, there is approximately a corresponding $3 of outstanding balances. This assumption is based on the ratio of the 2019 FFIEC Call Report data, which totaled $721 billion in outstanding balances on bank loans to small businesses and small farms, and the 2019 CRA data, which recorded $264 billion in bank loan originations to small businesses and small farms.

102

This assumption is limited by the extent to which other small business financing products differ from loans and lines of credit, which make up the majority of financing products captured by the FFIEC Call Report data and the CRA data.

103

102

FFIEC Call Report data records outstanding balances on loans with origination amounts less than $1 million across Commercial & Industrial, Nonfarm Nonresidential, Agricultural, and Secured by Farmland lending categories.

See

FDIC Quarterly Banking Profile Time Series,

https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx

(last visited August 29, 2021).

103

FFIEC Call Report data and CRA data on small business credit products also include business credit card products, but loans and lines of credit made up $713 billion out of $775 billion in outstanding balances on bank, savings association, and credit union loans to small businesses in 2019. One important caveat to this assumption is that products with materially shorter average term lengths, for example credit cards, factoring products, and MCAs, may have an inverse ratio of originations to outstanding balances. For example, top issuers of general purpose credit cards recorded purchase volumes of two to seven times their outstanding balances in 2020. Nilson Report, Issue 1192, at 6 (Feb. 2021),

https://nilsonreport.com/publication_newsletter_archive_issue.php?issue=1192

. If business-purpose credit cards, factoring products, and MCAs behaved similarly with respect to the ratio of originations to outstanding balances, then for every $1 originated in the market in a given year, there could be a corresponding $0.14-0.50 in outstanding balances for such products ($1 divided by two to seven).

As detailed in this section, the Bureau estimates that the market for small business financing products totaled $1.4 trillion in outstanding balances in 2019. The Bureau estimates that small business financing by depository institutions makes up just over half of small business financing by private institutions. In 2020 and 2021, COVID-19 emergency lending programs added a further $1 trillion to this value, bringing the overall size of the small business financing market up to $2.4 trillion. Below, the Bureau estimates the market share for different small business financing products.

Since the available data regarding depository institutions' small loans to businesses address term loans, lines of credit, and credit cards together, the respective share of different products in the overall small business financing market is difficult to assess. As detailed in this section, the Bureau estimates that together, private term loans and lines of credit constitute the largest small business credit product by value, totaling approximately $770 billion in outstanding balances in 2019, although PPP and EIDL Program loans have since added $1 trillion to this figure.

Lending by banks, saving associations, and credit unions comprises the largest part of this total amount for private term loans and lines of credit. Using FFIEC Call Report data for December 2019, the Bureau estimates that banks and savings associations account for a total of about $721 billion in outstanding credit to small businesses and small farms as of December 2019.

104

Using NCUA Call Report data for December 2019, the Bureau estimates that credit unions account for a total of about $55 billion in outstanding credit to members for commercial purposes.

105

From this value, the Bureau subtracts $62 billion in credit card lending to arrive at $713 billion in outstanding balances for term loans and lines of credit. From this value, the Bureau further subtracts $134 billion in SBA guaranteed loans to arrive at $580 billion in outstanding balances for private term loans and lines of credit extended by depository institutions (

i.e.,

banks, savings associations, and credit unions) as of December 2019.

104

Calculated from FFIEC Call Report data accessed on June 8, 2021. The Bureau notes that, as discussed in part II.B above, these estimates rely on small loans to businesses as a proxy for loans to small businesses. As such, the Bureau acknowledges that the true outstanding value of credit extended to small businesses by such institutions may be different than what is presented here. For example, the small loans to businesses proxy would overestimate the value of outstanding credit if a significant number of small loans to businesses and farms are to businesses or farms that are actually large. Alternatively, the proxy would underestimate the value of outstanding credit to small businesses if a significant number of businesses and farms that are small under the proposed rule take out loans that are larger than $1 million or $500,000, for businesses and farms, respectively.

105

Nat'l Credit Union Admin.,

2019 Call Report Quarterly Data,

https://www.ncua.gov/analysis/credit-union-corporate-call-report-data/quarterly-data

(last visited Aug. 24, 2021) (2019 NCUA Call Report). The Bureau notes that, as discussed in part II.B above, credit unions only report credit transactions made to members for commercial purposes with values over $50,000. The Bureau uses this value as a proxy for small business credit. The Bureau acknowledges that the true value of small business credit extended by credit unions may be different than what is presented here. For example, this proxy may overestimate the value of outstanding small business credit because some members are taking out loans for large businesses. Alternatively, this proxy may underestimate the value of outstanding small business credit if credit unions originate a substantial number of small business loans with origination values of under $50,000. For this analysis, the Bureau includes all types of commercial loans to members except construction and development loans and multifamily residential property. This includes loans secured by farmland; loans secured by owner-occupied, non-farm, non-residential property; loans secured by non-owner occupied, non-farm, non-residential property; loans to finance agricultural production and other loans to farmers; commercial and industrial loans; unsecured commercial loans; and unsecured revolving lines of credit for commercial purposes. The Bureau does include multifamily in part VII below.

The remaining $190 billion in outstanding balances for private term loans and lines of credit was extended by various nondepository institutions, namely commercial finance companies, fintechs, and nondepository CDFIs.

106

There may additionally be lending by equipment and vehicle dealers originating loans in their own name that is not captured here.

Commercial finance companies specialize in financing equipment and vehicle purchases. The Bureau estimates that the value of outstanding balances on credit extended by commercial finance companies totaled approximately $160 billion. Using data from the Federal Reserve Board's Finance Company Business Receivables data on owned assets as of December 2019, the Bureau estimates commercial finance companies outstanding credit for commercial purposes as the value of retail motor vehicle loans plus equipment loans and other business receivables, which totaled about $215 billion.

107

The Bureau further assumes that about 75 percent of this value, or $162 billion, can be attributed to loans to small businesses.

108

107

Bd. of Governors of the Fed. Reserve Sys.,

Finance Companies—G.20

(updated July 15, 2021),

https://www.federalreserve.gov/releases/g20/hist/fc_hist_b_levels.html

. The Bureau does not include leases, since they are already counted within the product category of equipment and vehicle leasing, or wholesale loans, which it assumes are typically made to non-small businesses.

108

This methodology is consistent with the approach taken by Gopal and Schnabl (2020).

Typical fintech providers are characterized primarily by providing banking services exclusively in an online environment.

109

The Bureau estimates that total outstanding loan balances for fintech providers reached around $25 billion in 2019. In a 2018 report, S&P Global projected that online

platform lenders would originate about $9.3 billion in credit to small and medium enterprises in 2019.

110

Using this estimate, the Bureau scales up the value of originations to $25 billion in estimated outstanding balances, under the assumptions discussed above.

111

At the beginning of the COVID-19 pandemic and financial crisis, fintechs originated around $22 billion in PPP loans to small businesses from March to August 2020

112

and likely continued to originate billions more during the third wave of PPP loans in 2021, which represents an almost 90 percent increase or more in outstanding balances since 2019.

113

This follows already rapid growth from $1.4 billion in estimated outstanding balances in 2013.

114

109

Barkley & Schweitzer, 17 Int'l J. Cent. Banking at 35-36.

110

2018 US Fintech Market Report at 6.

111

The Bureau notes that this figure may underestimate the total value of fintech lending because it focuses on platform lenders and may overestimate the value of lending to small businesses because it also includes credit to medium businesses. Additionally, the Bureau notes that fintechs often offer products besides loans and lines of credit, and that there is no clear demarcation between fintech, commercial finance company, and MCA provider, limiting the precision of market size estimates. Finally, fintechs often sell loans once originated to other entities, securitize their originations, or purchase loans that banks have originated, which may further present challenges to the precision of market size estimates for this market segment.

112

Jessica Battisto

et al., Who Benefited from PPP Loans by Fintech Lenders?,

Liberty Street Economics (May 27, 2021),

https://libertystreeteconomics.newyorkfed.org/2021/05/who-received-ppp-loans-by-fintech-lenders.html;

Small Bus. Admin.,

Paycheck Protection Program (PPP) Report

(approvals through 12 p.m. EST Apr. 16, 2020),

https://www.sba.gov/sites/default/files/2020-06/PPP%20Deck%20copy-508.pdf

; Small Bus. Admin.,

Paycheck Protection Program (PPP) Report

(approvals through Aug. 8, 2020),

https://www.sba.gov/sites/default/files/2020-08/PPP_Report%20-%202020-08-10-508.pdf

113

Per the program's intent, many PPP loans have been forgiven since the program began, which may mean that outstanding balances on PPP loans extended by fintech providers have since declined.

114

Barkley & Schweitzer, 17 Int'l J. Cent. Banking at 35-36 (citing 2018 US Fintech Market Report at 5). This figure annualizes $121 million in estimated 2013 quarterly originations to $484 million in annual originations and scales up to estimated outstanding balances using the ratio between the FFIEC Call Report and the CRA data discussed above.

The Bureau estimates the value of outstanding balances on credit extended by nondepository CDFIs to small business borrowers to be around $1.5 billion. Using reporting by the CDFI Fund for 2019, the Bureau scales down the outstanding balances for loan funds of $13.8 billion and for venture capital funds of $0.3 billion by the proportion of all CDFI lending attributable to business borrowers, which totaled $15.4 billion out of $141.2 billion.

115

CDFI Fund,

CDFI Annual Certification and Data Collection Report (ACR): A Snapshot for Fiscal Year 2019,

at 17, 22 (Oct. 2020),

https://www.cdfifund.gov/sites/cdfi/files/2021-01/ACR-Public-Report-Final-10292020-508Compliant.pdf

. To the extent that CDFI loan funds and venture capital funds extend credit to business customers at different rates than CDFI banks and credit unions, this calculation may over- or underestimate the value of lending to small businesses by nondepository CDFIs. This figure also assumes that all CDFI lending is for small businesses.

Categorized here separately so as to distinguish residential from non-residential loans, the Bureau estimates outstanding balances for loans on 5+ unit residential dwellings to total over $30 billion.

116

Using data from the Mortgage Bankers Association, the Bureau scales up $11 billion in 2019 annual originations on loans of under $1 million in value at origination for 5+ unit residential dwellings to $30 billion in estimated outstanding balances, using the ratio between the FFIEC Call Report and the CRA data discussed above.

117

116

Depository institutions, discussed above, extend a sizeable proportion of loans for 5+ unit residential dwellings; both nondepository and depository institutions are included in the total for 5+ unit outstanding balances.

117

See

Mortg. Bankers Ass'n,

Annual Report on Multi-Family Lending—2019,

at 5 (2020),

https://www.mba.org/store/products/research/general/report/2019-annual-report-on-multifamily-lending

. This includes both private loans, estimated at around $18 billion, and loans extended by Fannie Mae, Freddie Mac, and the FHA, estimated at around $13 billion. The share of 5+ unit residential dwelling loans of all sizes extended by governmental or government-sponsored entities was 41 percent. The Bureau assumes for the purposes of this exercise that the same share is reflected in loans of under $1 million in value at origination, although arguably this share would be higher if government and government-sponsored entities are extended disproportionately smaller dollar value loans on average.

Also categorized separately from depository institution totals so as to distinguish private from government and government-sponsored loans, the Bureau estimates that outstanding balances for loans extended by the Small Business Administration and the Farm Credit System totaled around $200 billion in 2019.

118

The grand total for lending by government and government-sponsored entities would be approximately $210 billion, including 5+ unit residential dwelling loans extended by Fannie Mae, Freddie Mac, and the FHA, which are separately recorded within the 5+ unit residential dwelling loan product category.

The SBA, through its traditional 7(a), 504, and microloan programs as well as the Economic Impact Disaster Loan (EIDL) program and funding for Small Business Investment Companies (SBICs), is the largest governmental lender by value, with $143.5 billion in outstanding balances at the end of fiscal 2019.

119

However, since the outbreak of the COVID-19 pandemic, SBA lending has increased in size by over $1 trillion due to the PPP, which totaled $800 billion, and the EIDL Program, which totaled $210 billion.

120

119

Small Bus. Admin.,

Small Business Administration Loan Program Performance

(effective Mar. 31, 2021),

https://www.sba.gov/document/report-small-business-administration-loan-program-performance

. SBA guaranteed loans comprised $134 billion out of this total, which amount has been deducted from the totals for depository institutions to avoid double counting.

120

Small Bus. Admin.,

Paycheck Protection Program (PPP) Report

(approvals through May 31, 2021),

https://www.sba.gov/sites/default/files/2021-06/PPP_Report_Public_210531-508.pdf;

Small Bus. Admin.,

Disaster Assistance Update—Nationwide COVID EIDL, Targeted EIDL Advances, Supplemental Targeted Advances

(June 3, 2021),

https://www.sba.gov/sites/default/files/2021-06/COVID-19%20EIDL%20TA%20STA_6.3.2021_Public-508.pdf;

Small Bus. Admin.,

Disaster Assistance Update—Nationwide EIDL Loans

(Nov. 23, 2020),

https://www.sba.gov/sites/default/files/2021-02/EIDL%20COVID-19%20Loan%2011.23.20-508_0.pdf

The Farm Credit System is another important government-related part of the small business credit landscape. The Bureau estimates that Farm Credit System members had around $55 billion in outstanding balances of credit extended to small farms in 2019. Using the same small loan to farms proxy as is used in the FFIEC Call Report, the Bureau estimates credit to farms with an origination value of less than $500,000. Based on the Farm Credit System's 2019 Annual Information Statement of the Farm Credit System, the Bureau estimates that outstanding balances of such small credit to farms totaled $55 billion at the end of 2019.

121

The Bureau notes that, as with the FFIEC Call Report proxy, this number may include credit to non-small farms and may exclude larger credit transactions extended to small farms.

121

Fed. Farm Credit Banks Funding Corp.,

Farm Credit 2019 Annual Information Statement of the Farm Credit System,

at 54,

https://www.farmcreditfunding.com/ffcb_live/investorResources/informationStatements.html

(last visited Aug. 13, 2021).

Mostly extended by depository institutions, the Bureau estimates that the market for small business credit cards totaled over $60 billion in outstanding balances for 2020.

122

Using data from Y-14 Form submissions to the Federal Reserve Board, the Bureau estimates the value of outstanding balances for small business credit card accounts where the loan is underwritten

with the sole proprietor or primary business owner as an applicant.

123

122

See

Bd. of Governors of the Fed. Reserve Sys., Report Forms FR Y-14M,

https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDYnbIw+U9pka3sMtCMopzoV

(last visited July 12, 2021). The Board's data are received from bank holding companies over $50 billion in assets, which represent 70 percent of outstanding balances for consumer credit cards; the corresponding percent of balances captured for small business cards is not known, so the total small business-purpose credit card market could be substantially higher or lower.

See

Bureau of Consumer Fin. Prot.,

The Consumer Credit Card Market,

at 18 (Aug. 2019),

https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2019.pdf

123

Off. of Mgmt. & Budget,

Instructions for the Capital Assessments and Stress Testing Information Collection (Reporting Form FR-Y14M),

OMB No. 7100-0341, at 148 (Mar. 2020),

https://omb.report/icr/202101-7100-006/doc/108187801.

Equipment and vehicle leasing, whereby businesses secure the right to possess and use a piece of equipment or vehicle for a term in return for consideration, is another important product category that is estimated to value roughly $160 billion in outstanding balances in 2019. Using data from the Equipment Leasing and Financing Foundation for 2019, the Bureau estimates the total size of the equipment and vehicle leasing market for all sized businesses in 2019 to be approximately $900 billion.

124

The Bureau further assumes that small businesses comprise around 18 percent of the total equipment and vehicle leasing market.

125

124

See

Equip. Leasing & Fin. Found.,

Horizon Report,

https://www.leasefoundation.org/industry-resources/horizon-report/

(last updated Apr. 22, 2021).

125

See

Karen Mills, Harvard Bus. Sch.,

State of Small Business Lending,

at 29 (July 2014),

https://www.hbs.edu/ris/Supplemental%20Files/15-004%20HBS%20Working%20Paper%20Chart%20Deck_47695.pdf

(estimating equipment leasing outstanding balances for small business borrowers at approximately $160 billion at Dec. 31, 2013); Monitor Daily,

SEFI Report Finds Strong Performance Despite Challenges,

https://www.monitordaily.com/news-posts/sefi-report-finds-strong-performance-despite-challenges/

(last visited July 27, 2021) ($903 billion market in 2014, commensurate with an 18 percent market share for small business borrowers at the time of the Karen Mills report).

Factoring is a similarly significant product type, estimated at around $100 billion in market size for 2019.

126

In a factoring transaction, factors purchase, at a discount, a legally enforceable claim for payment (

i.e.,

accounts receivables or invoices) for goods already supplied or services already rendered by a business for which payment has not yet been made; hence, a factor's risk related to repayment often lies with the business's customer and not the business itself. In most cases, specific companies, called factors, provide factoring products.

126

See

Secured Fin. Found.,

2019 Secured Finance: Market Sizing & Impact Study Extract Report,

at 7 (June 2019),

https://www.sfnet.com/docs/default-source/data-files-and-research-documents/sfnet_market_sizing___impact_study_extract_f.pdf?sfvrsn=72eb7333_2

. This study estimated the total volume of the U.S. factoring market to be $101 billion. To the extent that factoring volumes differ from outstanding balances, the value of outstanding balances may be higher or lower than this estimate. Also, this estimate captures factoring for business borrowers of all sizes, not just small business borrowers. The Bureau assumes that most factoring is provided to small business customers.

The market for MCAs is developing rapidly and data are even more scarce than for other segments of the small business lending market. This limits the reliability of estimates as to the MCA market's size. Based on market research conducted by Bryant Park Capital (BPC) and reported on by

deBanked.com

, the Bureau estimates the 2019 market size to be around $20 billion.

127

The MCA market is also of particular significance for smaller and traditionally underserved businesses that may not qualify for other types of credit.

128

MCAs are typically structured to provide a lump sum payment up front (a cash advance) in exchange for a share of future revenue until the advance, plus an additional amount, is repaid. Unlike the majority of other small business financing products, MCAs typically purport to be for short durations.

129

The Bureau understands that MCAs also tend to be relatively high-cost products.

130

Two States, New York and California, will soon implement laws that will require providers of “sales-based financing,” such as MCAs, to provide disclosures (including estimated APR) similar to those required under the Truth in Lending Act (TILA),

131

which generally only applies to consumer credit.

132

127

Paul Sweeney,

Gold Rush: Merchant Cash Advances are Still Hot,

deBanked (Aug. 18, 2019),

https://debanked.com/2019/08/gold-rush-merchant-cash-advances-are-still-hot/

. BPC estimates appear to reference origination volumes rather than outstanding balances.

See

Nimayi Dixit, S&P Global Market Intelligence,

Payment Fintechs Leave Their Mark On Small Business Lending

(Aug. 28, 2018),

https://www.spglobal.com/marketintelligence/en/news-insights/research/payment-fintechs-leave-their-mark-on-small-business-lending.

128

Cf.

Barbara Lipman & Ann Marie Wiersch, Bd. of Governors of the Fed. Reserve Sys.,

Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender websites,

at 3 (Dec. 2019),

https://www.federalreserve.gov/publications/files/what-small-business-borrowers-find-when-browsing-online-lender-websites.pdf

(observing that online lenders, including providers of MCA products, position themselves as offering financing to borrowers underserved by traditional lenders).

129

See id.

(stating that MCAs are generally repaid in three to 18 months).

130

Id.

(stating that annual percentage rates on MCA products can exceed 80 percent or rise to triple digits).

See also

Fed. Trade Comm'n,

`Strictly Business' Forum, Staff Perspective,

at 5 (Feb. 2020),

https://www.ftc.gov/system/files/documents/report/staff-perspective-paper-ftcs-strictly-business-forum/strickly_business__forum_staff_perspective.pdf

(observing stakeholder concern about the high-cost of MCAs that can reach triple digit annual percentage rates).

131

15 U.S.C. 1601

et seq.

132

New York State law will require, as of January 1, 2022, that providers of “sales-based financing” provide disclosures to borrowers which would include calculations of an estimated annual percentage rate in accordance with the Bureau's Regulation Z, 12 CFR part 1026.

See

New York S.898, section 803(c) (signed Jan. 6, 2021) (amending S.5470-B),

https://legislation.nysenate.gov/pdf/bills/2021/s898

. Similarly, California's Department of Financial Protection and Innovation is in the process of issuing a rule to implement a California law requiring disclosures by commercial financing companies, including those providing sales-based financing.

See

10 Cal. Code Reg. 2057(a)(22) (defining sales-based financing as “a commercial financing transaction that is repaid by a recipient to the financer as a percentage of sales or income, in which the payment amount increases and decreases according to the volume of sales made or income received by the recipient” and including “a true‐up mechanism”); 10 Cal. Code Reg. 2065(a)(3) and 3001 (requiring sales-based financing providers disclosure estimated annual percentage rate according to Regulation Z, 12 CFR part 1026). Under these laws, providers of commercial financing generally will be required to disclose: (1) The total amount financed, and the amount disbursed if it is different from the total amount financed; (2) the finance charge; (3) the APR (or the estimated APR for sales-based financing and factoring transactions), calculated in accordance with TILA and Regulation Z; (4) the total repayment amount; (5) the term (or the estimated term for sales-based financing) of the financing; (6) periodic payment amounts; (7) prepayment charges; (8) all other fees and charges not otherwise disclosed; and (9) any collateral requirements or security interests.

See

Cal. S.B. 1235 (Sept. 30, 2018),

https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235;

N.Y. S.B. S5470B (July 23, 2020),

https://legislation.nysenate.gov/pdf/bills/2019/S5470B.

Finally, trade credit is another significant market, which the Bureau estimates to total $51 billion in outstanding balances in 2019. Using a report by Fundbox/PYMNTS, the Bureau estimates the trade credit market size by adding the total accounts payable for businesses under $1 million in annual revenue.

133

Considering the total value of accounts payable for businesses between $1 million and $5 million would increase the market size by $88 billion.

134

Trade credit is an often informal, business-to-business transaction, usually between non-financial firms whereby suppliers allow their customers to acquire goods and/or

services without requiring immediate payment.

133

See

Fundbox/PYMNTS.com,

The Trade Credit Dilemma,

at 11 (May 2019),

https://www.pymnts.com/wp-content/uploads/2019/05/Trade-Credit-Dilemma-Report.pdf

(estimating accounts payable for businesses with revenue of under $250,000 at $6.7 billion and for businesses with revenue of $250,000 to $999,000 at $44.6 billion).

134

Id.

The trade credit market is estimated to total $1.6 trillion across all business sizes in the United States. In the overall $1.4 trillion market size total for all small business financing products, the Bureau has included only the trade credit market for businesses of up to $1 million in revenue for consistency with its White Paper.

The Bureau estimates that there were approximately 8,100 financial institutions extending small business financing in 2019, almost 80 percent of which were depository institutions.

Based on FFIEC Call Report data for December 2019, the Bureau estimates that about 5,100 banks and savings associations are active in the small business lending market, out of a total of about 5,200 banks and savings associations.

135

The Bureau assumes that a bank or savings association is “active” in the market if it reports a positive outstanding balance of small loans, lines of credit, and credit cards to businesses.

135

Calculated from FFIEC Call Report data accessed on June 8, 2021.

Based on the NCUA Call Report data for December 2019, the Bureau estimates that about 1,200 out of 5,300 total credit unions were active in the small business lending market.

136

The Bureau defines a credit union as “active” in the market if it reported a positive number of originations of loans, lines of credit, and credit cards to members for commercial purposes in 2019.

136

2019 NCUA Call Report. (One hundred twelve credit unions were not federally insured as of December 2019 but are included here as depository institutions. Calculated from NCUA Call Report data accessed on June 8, 2021.)

The Bureau estimates that there are about 1,800 nondepository institutions active in the small business financing market,

137

accounting for around $550 billion in outstanding credit to small businesses.

137

There may also be cooperative or nonprofit lenders as well as equipment and vehicle finance dealers originating in their own name that are not captured by the Bureau in these figures. For example, by searching Uniform Commercial Code (UCC) filings, Manasa Gopal and Philipp Schnabl identified 19 cooperative lenders that originated at least 1,500 loans over the period from 2006 to 2016. Manasa Gopal & Philipp Schnabl,

The Rise of Finance Companies and FinTech Lenders in Small Business Lending,

N.Y.U. Stern Sch. of Bus., at 18 (May 13, 2020),

https://ssrn.com/abstract=3600068.

Additionally, these figures do not include trade creditors, which are non-financial companies that extend credit by allowing customers a period of time in which to pay and which are much greater in number since the practice is widespread across the economy.

The Bureau estimates that about 300 commercial finance companies are engaged in small business lending. By searching UCC filings, Manasa Gopal and Philipp Schnabl identified almost 300 commercial finance companies, including both independent and captive finance companies, with at least 1,500 small business loans between 2006 and 2016.

138

The Bureau also estimates there to be about 30 or more fintechs currently active in the small business lending market, not including MCA providers. Using the same methodology as for commercial finance companies, Gopal and Schnabl identified 19 fintech companies.

139

The Bureau conservatively increases this estimate to 30 to account for rapid growth in the industry from 2016 to 2019.

138

Id. This figure combines

192 independent finance companies with 95 captive finance companies. Since this estimate captures only those commercial finance companies averaging at least 150 loans per year over the 2006 to 2016 period, it may exclude smaller volume lenders and should be considered conservative.

139

Id.

Since this estimate captures only those fintechs averaging at least 150 loans per year over the 2006 to 2016 period, it may exclude smaller volume lenders and should be considered conservative. On the other hand, since 2019, the COVID-19 economic shock may have led to some fintechs scaling back or exiting the small business financing market.

See, e.g.,

Ingrid Lunden,

Amex Acquires SoftBank-backed Kabbage After Tough 2020 for the SMB Lender,

TechCrunch (Aug. 17, 2020),

https://techcrunch.com/2020/08/17/amex-acquires-softbank-backed-kabbage-after-tough-2020-for-the-smb-lender/

(noting that Kabbage temporarily shut down credit lines to small businesses during April 2020 and then spun off its small business loan portfolio when it was subsequently acquired by American Express).

The Bureau estimates that 340 nondepository CDFIs are engaged in small business lending. Both depository and nondepository institutions can be CDFIs. Depository CDFIs are counted in the numbers of banks, savings associations, and credit unions engaged in small business lending. According to the CDFI fund, 487 nondepository funds (

i.e.,

loan funds and venture capital funds) reported as CDFIs in 2019.

140

Of these, 340 institutions reported that business finance or commercial real estate finance were a primary or secondary line of business in 2019.

141

140

CDFI Fund,

CDFI Annual Certification and Data Collection Report (ACR): A Snapshot for Fiscal Year 2019,

at 8 (Oct. 2020),

https://www.cdfifund.gov/sites/cdfi/files/2021-01/ACR-Public-Report-Final-10292020-508Compliant.pdf

141

Id.

at 15-16.

The Bureau estimates that about 270 nondepository mortgage lenders participated in the credit market for 5+ unit residential dwellings in 2019 and that about 50 of these institutions extended 25 or more of these loans to small businesses. In its “2019 Multifamily Lending Report,” the Mortgage Bankers Association lists annual multifamily lending volumes by institution, including a distinction for loans of under $1 million in value at origination.

142

Using the same small loan to business proxy as is used in the FFIEC Call Report, the Bureau estimates the number of nondepository mortgage lenders by counting the number of institutions that appear on this list that are not depository institutions and that extended at least 50 loans in 2019. The Bureau counts institutions extending at least 50 loans of any size in order to estimate institutions extending at least 25 small loans, based on the assumption that some 50 percent of these loans may have been for values greater than $1 million.

142

See

Mortg. Bankers Ass'n,

Annual Report on Multi-Family Lending—2019,

at 9-66 (2020),

https://www.mba.org/store/products/research/general/report/2019-annual-report-on-multifamily-lending

Based on data from UCC filings collected by deBanked.com, the Bureau estimates that about 100 institutions were active in the market for providing MCA products to small businesses in 2021.

143

deBanked,

UCC-1 and UCC-3 Filings by Merchant Cash Advance Companies & Alternative Business Lenders,

https://debanked.com/merchant-cash-advance-resource/merchant-cash-advance-ucc/

(last visited July 11, 2021).

The Bureau estimates the number of factors to be between 700-900 and assumes that most factors are providing financing to small business.

144

See

Secured Fin. Found.,

2019 Secured Finance: Market Sizing & Impact Study Extract Report,

at 15 (June 2019),

https://www.sfnet.com/docs/default-source/data-files-and-research-documents/sfnet_market_sizing___impact_study_extract_f.pdf?sfvrsn=72eb7333_2

(estimating the number of factors at between 700 and 900).

Finally, many government agencies and government-sponsored enterprises provide or facilitate a significant proportion of small business credit. As the flagship government lender, the Small Business Administration managed in 2019 a portfolio of over $140 billion in loans to small businesses, to which it added over $1 trillion in loans extended as part of the COVID-19 emergency lending programs. Across Federal, State, and municipal governments, the Bureau estimates that there are likely over 100 government small business lending programs.

145

Additionally, the Farm Credit System reports that, as of December 2019, the Farm Credit System contains a total of 72 banks and associations.

146

The Bureau assumes that all of these Farm Credit System institutions are engaged in lending to small farms.

145

In addition to several Federal small business lending programs, States and major municipalities also often have one or more programs of their own. One State and one municipal program in each State would already total 100 government lending programs across Federal, State, and municipal governments.

146

Fed. Farm Credit Banks Funding Corp.,

Farm Credit 2019 Annual Information Statement of the Farm Credit System,

at 7 (Feb. 28, 2020),

https://www.farmcreditfunding.com/ffcb_live/serve/public/pressre/finin/.pdf?assetId=395570

. The Bureau notes that Farm Credit System banks do not report FFIEC Call Reports and are thus not counted in the number of banks and savings associations discussed above.

E. Challenges for Women-Owned and Minority-Owned Small Businesses

Within the context of small business financing, women-owned and minority-owned businesses often face relatively more challenges than their counterparts. Specifically, women-owned and minority-owned small businesses can be even more susceptible to the impact of economic shocks and have a harder time accessing credit to survive and thrive in better times.

Although women-owned and minority-owned businesses are found in many industry sectors, women-owned businesses are concentrated in the health care and social assistance sector, while minority-owned businesses are primarily concentrated in the service sector, the healthcare and social assistance sector, and the administrative support, waste management and remediation sectors.

147

During economic downturns, such as the Great Recession and the financial crisis resulting from the COVID-19 pandemic, women-owned and minority-owned small businesses tend to fare worse than other small businesses. Women and minority business owners have been disproportionately hurt by the COVID-19 pandemic, with rates of business ownership dropping from February to April 2020 by 41 percent, 32 percent, and 26 percent for African American, Latinx, and Asian individuals, respectively, compared with 17 percent for white individuals.

148

Female business ownership declined by 25 percent, compared with 20 percent for male ownership.

149

147

White Paper at 12, 15.

148

Robert Fairlie, Stanford Inst. for Economic Policy Research, Working Paper No. 20-022,

The Impact of COVID-19 on Small Business Owners: Evidence of Early Stage Losses from the April 2020 Current Population Survey,

at 5 (May 2020),

https://siepr.stanford.edu/sites/default/files/publications/20-022.pdf

. The authors define the rate of business ownership as the percentage of the labor force that owns and is actively employed in a business as their main job in the survey month.

Id.

at 3. As such, the decline in business ownership could reflect owners not only exiting the labor market but also switching to a different (wage and salary) job. In many cases, these exit or switching trends were temporary reactions to public health lockdowns and have since partially reversed.

149

Id.

at 6, 8.

Women-owned and minority-owned small businesses often have smaller cash reserves on average, leaving them less able to weather downturns and credit crunches. For example, in February 2021, 39 percent of women-owned businesses had one month or less in cash reserves, compared with 29 percent of men-owned firms.

150

And in around 90 percent of majority Black and Hispanic communities, most businesses have fewer than 14 days of cash buffer, while this is true of only 35 percent of majority white communities.

151

As a result, many small businesses, especially those owned by women and minorities, may have had a greater need for financing just as small business lenders began to approve fewer loans in response to economic uncertainty. Loan approvals at smaller banks dropped from 50 percent pre-pandemic to 12 percent in April 2020 and have settled between 18 and 19 percent since June 2020; the trend is similar for large banks, credit unions, and fintechs.

152

150

Eric Groves,

Cash Strapped SMBs, While 75% Of PPP Is Still Available,

Alignable (Feb. 9, 2021),

https://www.alignable.com/forum/alignable-road-to-recovery-report-february-2021?utm_campaign=February&utm_medium=Press&utm_source=Press

151

JPMorgan Chase Inst.,

Place Matters: Small Business Financial Health in Urban Communities,

at 5 (Sept. 2019),

https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/institute/pdf/institute-place-matters.pdf

152

Biz2Credit,

Small Business Lending Index,

https://www.biz2credit.com/small-business-lending-index

(last visited July 27, 2021).

The PPP—part of the Federal government's response to the pandemic—helped to keep many small businesses afloat, but a number of factors prevented minority-owned small businesses from accessing PPP loans as easily as other firms. For example, established banking relationships between applicants and lending providers were often critical to approvals in early PPP underwriting;

153

many minority-owned businesses did not have such relationships.

154

Further, many minority-owned firms are sole proprietorships and independent contractors, both of which received delayed access to PPP loans.

155

Unprofitable non-employer firms were also initially barred from receiving loans.

156

Although Black-owned firms are more likely to use fintech providers, these lenders were only belatedly allowed to disburse PPP funds.

157

However, once fintech providers were allowed to disburse PPP loans, Black borrowers in particular benefited from this access, highlighting the ability of fintech firms to reach minority-owned business borrowers.

158

153

Sara Savat,

Who you know matters, even when applying for PPP loans,

The Source, Newsroom, Wash. Univ. in St. Louis (Feb. 15, 2021),

https://source.wustl.edu/2021/02/who-you-know-matters-even-when-applying-for-ppp-loans/

(previous lender relationship increased likelihood of obtaining a PPP loan by 57 percent).

See generally

86 FR 7271, 7280 (Jan. 27, 2021) (noting that many banks restricted access to PPP loans to existing customers, which may run a risk of violating the ECOA and Regulation B).

154

Claire Kramer Mills, Fed. Reserve Bank of N.Y.,

Double Jeopardy: COVID-19's Concentrated Health and Wealth Effects in Black Communities,

at 6 (Aug. 2020),

https://www.newyorkfed.org/medialibrary/media/smallbusiness/DoubleJeopardy_COVID19andBlackOwnedBusinesses

(arguing that a lack of strong banking relationships among Black-owned firms may have led to relatively lower rates of access to PPP loans for such firms); Fed. Reserve Banks,

Small Business Credit Survey: 2021 Report on Firms Owned by People of Color,

at ii (Apr. 15, 2021),

https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2021/sbcs-report-on-firms-owned-by-people-of-color

(Small Business Credit Survey of Firms Owned by People of Color) (finding that “firms owned by people of color tend to have weaker banking relationships”).

155

Greg Iacurci,

Coronavirus loan program delayed for independent contractors and self-employed workers,

CNBC (Apr. 3, 2020),

https://www.cnbc.com/2020/04/03/delays-in-sba-loans-for-independent-contractors-self-employed-workers.html

156

Stacy Cowley,

`It Was a Joke': Some Small Businesses Got $1 Relief Loans,

N.Y. Times (Jan. 11, 2021),

https://www.nytimes.com/2021/01/11/business/small-businesses-ppp-covid.html

(observing that sole proprietorships were initially eligible for PPP loans only if they were profitable);

See also

Press Release, Bureau of Consumer Fin. Prot.,

CFPB Clarifies That Discrimination by Lenders on the Basis of Sexual Orientation and Gender Identity Is Illegal

(Mar. 9, 2021),

https://www.consumerfinance.gov/about-us/newsroom/cfpb-clarifies-discrimination-by-lenders-on-basis-of-sexual-orientation-and-gender-identity-is-illegal/

. The interpretive rule states that an example of discriminatory sex-based or gender-based stereotyping occurs if a small business lender discourages a small business owner appearing at its office from applying for a business loan and tells the prospective applicant to go home and change because, in the view of the creditor, the small business customer's attire does not accord with the customer's gender. 86 FR at 14365.

168

15 U.S.C. 1601

et seq.

169

See

Regulation B § 1002.4(a) and (b).

170

Id.

§ 1002.4(b).

171

Id.

§ 1002.5(b) through (d).

The Bureau has recognized the following methods of proving lending discrimination under ECOA and Regulation B: Overt evidence of discrimination, evidence of disparate treatment, and evidence of disparate impact.

172

Overt evidence of discrimination exists when a creditor blatantly discriminates on a prohibited basis.

173

Disparate treatment occurs when a creditor treats an applicant differently based on a prohibited basis such as race or national origin.

174

Disparate impact occurs when a creditor employs facially neutral policies or practices that have an adverse effect or impact on a member of a protected class unless the facially neutral policies or practices meet a legitimate business need that cannot reasonably be achieved by means that are less disparate in their impact.

175

172

See

Bureau of Consumer Fin. Prot.,

CFPB Bulletin 2012-04 (Fair Lending), Lending Discrimination

(Apr. 18, 2012),

https://files.consumerfinance.gov/f/201404_cfpb_bulletin_lending_discrimination.pdf

(Interagency Policy Statement on Discrimination in Lending) (concurring with Interagency Task Force on Fair Lending,

Policy Statement on Discrimination in Lending,

59 FR 18266 (Apr. 15, 1994)).

173

See

Interagency Policy Statement on Discrimination in Lending at 18268.

174

See

Regulation B comment 4(a)-1 (stating that “[d]isparate treatment on a prohibited basis is illegal whether or not it results from a conscious intent to discriminate”); Bureau of Consumer Fin. Prot.,

Equal Credit Opportunity Act (ECOA) Examination Procedures,

at 1 (Oct. 30, 2015),

https://files.consumerfinance.gov/f/documents/201510_cfpb_ecoa-narrative-and-procedures.pdf

(ECOA Examination Procedures);

See also

78 FR 11459, 11459 (Feb. 15, 2013) (stating that HUD, which is statutorily charged with the authority and responsibility for interpreting and enforcing the Fair Housing Act and with the power to make rules implementing the Act, “has long interpreted the Act to prohibit practices with an unjustified discriminatory effect, regardless of whether there was an intent to discriminate”).

The DOJ and HUD are jointly responsible for enforcing the Fair Housing Act. The Fair Housing Act authorizes the HUD Secretary to issue a Charge of Discrimination on behalf of aggrieved persons following an investigation and a determination that reasonable cause exists to believe that a discriminatory housing practice has occurred.

188

The DOJ may bring lawsuits where there is reason to believe that a person or entity is engaged in a “pattern or practice” of discrimination or where a denial of rights to a group of persons raises an issue of general public importance,

189

or where a housing discrimination complaint has been investigated by HUD, HUD has issued a Charge of Discrimination, and one of the parties to the case has “elected” to go to Federal court.

190

In FHAct cases, HUD and the DOJ can obtain injunctive relief, including affirmative requirements for training and policy changes, monetary damages and, in pattern or practice cases, civil penalties.

191

188

42 U.S.C. 3610(g)(1) and (2).

189

See

42 U.S.C. 3614(a).

190

42 U.S.C. 3612(o)(1).

191

See

42 U.S.C. 3612, 3614.

Upon receipt of a complaint alleging facts that may constitute a violation of the FHAct or upon receipt of information from a consumer compliance examination or other information suggesting a violation of the FHAct, Federal executive agencies forward such facts or information to HUD and, where such facts or information indicate a possible pattern or practice of discrimination in violation of the FHAct, to the DOJ.

192

Private parties may also bring claims under the civil enforcement provisions of FHAct.

193

192

59 FR 2939, 2939 (Jan. 17, 1994).

193

See

42 U.S.C. 3613.

iv. Other Fair Lending Laws

Several other Federal statutes seek to promote fair lending. The CRA seeks affirmatively to encourage institutions to help to meet the credit needs of the entire community served by each institution covered by the statute, and CRA ratings take into account lending discrimination by those institutions.

194

The Americans with Disabilities Act of 1990 prohibits discrimination against persons with disabilities in the provision of goods and services, including credit services.

195

Sections 1981

196

and 1982

197

of the Federal Civil Rights Acts are broad anti-discrimination laws that have been applied to many aspects of credit transactions.

198

194

See

12 U.S.C. 2901

et seq.

195

See

42 U.S.C. 12101

et seq.

196

42 U.S.C. 1981(a).

197

42 U.S.C. 1982.

198

See, e.g., Jackson

Novastar Mortg., Inc.,

645 F. Supp. 2d 636 (W.D. Tenn. 2007) (motion to dismiss claim that defendants violated sections 1981 and 1982 by racial targeting and by offering credit on less favorable terms on the basis of race denied);

Johnson

Equicredit Corp.,

No. 01-CIV-5197, 2002 U.S. Dist. LEXIS 4817 (N.D. Ill. Mar. 22, 2002) (predatory lending/reverse redlining case brought pursuant to section 1981);

Hargraves

Cap. City Mortg. Corp.,

140 F. Supp. 2d 7 (D.D.C. 2000) (predatory lending/reverse redlining case brought under both sections 1981 and 1982),

reconsideration granted in part, denied in part,

147 F. Supp. 2d 1 (D.D.C. 2001) (section 1981 claim dismissed for lack of standing, but not section 1982 claim);

Doane

Nat'l Westminster Bank USA,

938

F. Supp. 149 (E.D.N.Y. 1996) (mortgage redlining case brought under sections 1981 and 1982);

Fairman

Schaumberg Toyota, Inc.,

No. 94-CIV-5745, 1996 U.S. Dist. LEXIS 9669 (N.D. Ill. July 10, 1996) (section 1981 suit over allegedly predatory credit scheme targeting African Americans and Hispanics);

Steptoe

Sav. of Am.,

800 F. Supp. 1542 (N.D. Ohio 1992) (mortgage redlining case brought under sections 1981 and 1982 and the Fair Housing Act);

Evans

First Fed. Sav. Bank of Ind.,

669 F. Supp. 915 (N.D. Ind. 1987) (section 1982 can be used in mortgage lending discrimination case);

Assocs. Home Equity Servs.

Troup,

778 A.2d 529 (N.J. 2001) (predatory lending/reverse redlining case brought pursuant to section 1981).

Many States and municipalities have also enacted fair lending, fair housing, and/or civil rights laws (often modeled on their Federal counterparts) that seek to broadly prohibit credit discrimination, including protections for business credit.

199

Some of these laws expressly enumerate protections beyond those expressly enumerated in the Federal statutes.

200

199

See, e.g.,

Cal. Civ. Code 51 and 51.5 and Cal. Gov't Code 12955; Colo. Rev. Stat. 24-34-501(3) and 5-3-210; Conn. Gen. Stat. 46a-81e, 46a-81f, and 46a-98; Del. Code Ann. tit. 6, 4604; D.C. Code 2-1402.21; Haw. Rev. Stat. 515-3 and 515-5; 775 Ill. Comp. Stat. 5/1-102, 5/1-103, 5/4-102, 5/3-102, and 5/4-103; Iowa Code 216.8A and 216.10; Me. Rev. Stat. tit. 5, 4553(5-C) and (9-C), 4595 to 4598, and 4581 to 4583; Md. Code Ann. State Gov't 20-705, 20-707, and 20-1103; Mass. Gen. Laws ch. 151B, 4(3B), (14); Minn. Stat. 363A.03 (Subd. 44), 363A.09(3), 363A.16 (Subds. 1 and 3), and 363A.17; N.H. Rev. Stat. Ann. 354-A:10; N.J. Stat. Ann. 10:5-12(i); N.M. Stat. Ann. 28-1-7; N.Y. Civ. Rights Law 40-c(2); N.Y. Exec. Law 296-A; Or. Rev. Stat. 174.100(7) and 659A.421; R.I. Gen. Laws 34-37-4(a) through (c), 34-37-4.3, and 34-37-5.4; Va. Code Ann. 6.2-501(B)(1), 15.2-853, and 15.2-965; Vt. Stat. Ann. tit. 8, 10403 and tit. 9, 2362, 2410, and 4503(a)(6); Wash. Rev. Code 49.60.030, 49.60.040 (14), (26), and (27), 49.60.175, and 49.60.222; Wis. Stat. 106.50 and 224.77. There are also a number of municipalities that have enacted credit discrimination ordinances.

See, e.g.,

Austin City Code 5-1-1

et seq.;

N.Y.C. Admin. Code 8-101 and 8-107

et seq.;

S.F. Police Code 3304(a)

et seq.

200

See, e.g.,

Mass. Gen. Laws ch. 151B, 4(3B) (prohibiting discrimination based on genetic information); N.J. Stat. Ann. 10:5-1 to 10:5-42 (same); D.C. Code 2-1401.02 and 2-1402.21 (extending protections from discrimination to domestic violence victims); Wis. Stat. 224.77 (same); N.Y. Exec. Law 296-a (prohibiting discrimination on the basis of military status) (credit transactions); N.Y. Exec. Law 296(5)(a) through (c) (same) (housing transactions); Wash. Rev. Code 49.60.176 (protecting veterans and honorably discharged service members); 775 Ill. Comp. Stat. 5/3-101 and 5/4-101 (prohibiting discrimination based on an applicant's unfavorable discharge from the military); 815 Ill. Comp. Stat. 140/1a (same). Several other State statutes also prohibit discrimination based on the geographic area of residence.

See, e.g.,

815 Ill. Comp. Stat. 120/1 to 120/6; Iowa Code 535A.1 to 535A.9; Md. Code Ann., Com. Law 12-603 (West); Mich. Comp. Laws 445.1601 to 445.1614; Minn. Stat. 363A.09(3)(c); N.Y. Banking Law 9-f; Wash. Rev. Code 30.04.500 to 30.04.515.

v. Facilitating Enforcement

In order for the 1071 rule to facilitate enforcement of the fair lending laws discussed above, the Bureau believes that it must collect and make available sufficient data to help the public and regulators identify potentially discriminatory lending patterns that could constitute violations of fair lending laws. Financial regulators and enforcement agencies need a consistent and comprehensive dataset for all financial institutions subject to 1071 reporting in order to also use 1071 data in their initial prioritization, peer analysis, redlining reviews, and screening processes to select institutions for monitoring, examination, or investigation. Section 1071 data would facilitate more efficient fair lending examinations. For example, regulators could use pricing and other data to prioritize fair lending examinations—without such data, some financial institutions would face unnecessary examination burden while others whose practices warrant closer review would not receive sufficient scrutiny.

Moreover, as discussed in part V below, the Bureau believes specific aspects of its proposal offer particular benefits for the enforcement of fair lending laws. For example, the Bureau's proposal regarding transactional and institutional coverage would allow community groups and government agencies to include most of the small business financing market in fair lending analyses. The proposed inclusion of pricing data fields such as interest rate and fees would provide information on disparities in pricing outcomes, and data fields such as gross annual revenue, denial reasons, and time in business would allow for a more refined analysis and understanding of disparities in both underwriting and pricing outcomes. While 1071 data alone generally will not offer proof of compliance with fair lending laws, regulators, community groups, researchers, and financial institutions will be able to use 1071 data to identify potential disparities in small business lending based on disaggregated categories of race and ethnicity. Overall, the data collection under 1071 rule will allow, for the first time, for comprehensive and market-wide fair lending risk analysis.

2. Identifying Business and Community Development Needs

The second purpose of section 1071 is to enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.

201

ECOA section 704B(a).

Section 1071 does not expressly define the phrase “business and community development needs.” However, other Federal statutes and regulations, including the CRA and the Riegle Community Development and Regulatory Improvement Act of 1994,

202

reference or define the phrases “business development” and “community development” and can help explain what it means to enable communities, governmental entities, and creditors to “identify business and community development needs and opportunities.”

202

Public Law 103-325, tit. I, section 102, 108 Stat. 2160, 2163 (1994) (12 U.S.C. 4701 through 4719).

The Bureau believes, based on its consideration of these other Federal statutes and regulations, that the proposed 1071 rule would provide more data to the public—including communities, governmental entities, and creditors—for analyzing whether financial institutions are serving the credit needs of their small business customers. In addition, with 1071 data, the public would be better able to understand access to and sources of credit in particular communities or industries, such as a higher concentration of risky loan products in a given community, and to identify the emergence of new loan products, participants, or underwriting practices. The data would not only assist in identifying potentially discriminatory practices, but would also contribute to a better understanding of the experiences that members within certain communities may share in the small business financing market.

i. Community Reinvestment Act (CRA)

The CRA, a part of the Housing and Community Development Act, was passed by Congress in 1977, which found that “regulated financial institutions have continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.”

203

As such, one of the statutory purposes of the CRA is to encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions.

204

203

12 U.S.C. 2901(a)(3).

204

12 U.S.C. 2901(b).

The legislative history for the CRA suggests that the concerns motivating the Act's passage included certain practices by banks including redlining (

i.e.,

declining to extend credit in neighborhoods populated by ethnic or racial minorities)

205

and community

disinvestment (

i.e.,

taking deposits from lower-income areas, often populated by ethnic or racial minorities, without extending credit or banking services to residents of those areas).

206

The CRA requires the “appropriate Federal financial supervisory agency” of a given depository institution to “prepare a written evaluation of the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods.”

207

These requirements were first implemented by a 1978 rulemaking,

208

and were amended in 1995

209

and 2005.

210

These rulemakings, adopted by each of the agencies responsible for ensuring compliance with the CRA, established specific performance measures,

211

requiring banks to disclose information about small business, small farm and community development lending.

212

205

See

H.R. Rep. No. 561, 94th Cong., 1st Sess. 4 (1975) (“[The practice of redlining] increasingly

has served to polarize elements of our society . . . . As polarization intensifies, neighborhood decline accel

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.