Section 1071: Finding a Common Ground for Small Business Lending Data Collection
Proposed changes to small business lending reporting could help close information gaps and further equity.
Small businesses—those that employ fewer than 500 workers, according to the Small Business Administration (SBA) Office of Advocacy—are found in many industries. They can range from a web design company to a childcare provider to a restaurant. But regardless of their industry or number of people they employ, small businesses are generally united in the need for access to credit.
Access to credit can help small businesses overcome operational challenges (such as disruptions due to a global pandemic), implement innovation, and expand. How businesses access credit has changed dramatically in recent years. Historically, small businesses’ choices for obtaining credit were few and the process was often rigid. Today, the marketplace for credit has expanded beyond banks and now includes an assortment of fintech lenders, crowd-funding platforms, nonprofit organizations, and more. One might assume that data are routinely, consistently, and comprehensively collected on these credit products.
But that assumption would be wrong.
Currently, only some aspects of small business lending information are collected. Data are primarily collected in tandem with the Community Reinvestment Act (CRA) and call report data collected by regulatory agencies, both of which focus on banks. Additionally, small business surveys and polls are valuable for determining the experiences of often hard-to-reach small business owners as they seek credit. However, though data sources are varied, what’s missing is a consolidated, regularly collected, uniform source of data on small business lending from small business lenders.
Proposed changes to small business lending reporting under Section 1071 of the Dodd-Frank Act could help address this information gap. Such changes could also address gaps in information between applications and loans being made across the diverse marketplace of lenders and small business owners. Section 1071 amended the Equal Credit Opportunity Act to require financial institutions to compile, maintain, and submit to the Consumer Financial Protection Bureau (CFPB) a variety of new data points about their small business credit applications and approvals. The proposed data under Section 1071 include demographic information about the applicant (such as the principal owner’s race and sex) and the type of credit that was applied for and offered (including pricing information). The CFPB issued a proposed rule on September 1, 2021; it is important to note that this rule is not yet final.
Prospects and Limitations of Section 1071
A potentially important benefit of implementing Section 1071 is that it could support further equity in small business lending practices. Because the information being proposed for submission includes applicant demographics and the type of credit applied for, received, or declined, it may aid in the enforcement of fair lending laws that seek to ensure diverse small business needs are being met. The data could also clarify to lenders where they may have gaps in their lending practices. And as a disaggregated dataset, the information may further a collective understanding of disparities in loan access and how applicants are impacted.
Interise, a national nonprofit that helps strengthen established small businesses in pursuit of an economy that works for all, sees evidence of lending disparities by gender, race, and ethnicity through its data collection and research. For example, after completing Interise’s StreetWise ‘MBA’ capacity building program, male-owned firms in the network secured 34 percent more new financing dollars on average than women-owned firms in 2020. In that same year, white business owners secured 43 percent and 34 percent more new financing dollars on average than their Black and Latinx business owner counterparts, respectively.
Data from the Federal Reserve’s Small Business Credit Survey (SBCS) similarly points to persistent disparities in access to credit by race. For example, the SBCS 2022 Report on Employer Firms shows that 19 percent of Hispanic-owned firms, 16 percent of Black-owned firms, and 15 percent of Asian-owned firms that applied for financing in the year prior to the survey actually received all the money they sought. Comparatively, 35 percent of white-owned firms received all the financing they applied for. Such disparities have been a long-running finding of the Fed’s SBCS.
Additionally, disparities in access to credit are fertile ground for minority small businesses to receive unfavorable loan products in the absence of traditional credit. Section 1071 data would likely shed more light on the types of credit businesses are obtaining and may help facilitate more equitable access to credit systems. It’s important that the systems that support small businesses work in an equitable way because, as the COVID-19 pandemic made clear, business owners regardless of their race or ethnicity sometimes need credit to weather challenging times.
However, Section 1071 has faced questions that are important to consider, and comments on the proposed rule have included both concerns and recommendations. Smaller lending institutions that serve key market segments have expressed concerns about upfront implementation costs and annual compliance costs. Less competition in financial service offerings from the consolidation of community banks could negatively affect small business borrowers downstream. Apart from financial burdens on lenders and subsequent implications for borrowers, commenters also raised concerns about the accuracy of reported race and ethnicity data as well as applicant privacy. Other comments suggested an expansion in data collection to include more robust loan pricing and term information along with underwriting factors such as the number of employees.
Access to credit can be a lifeline for small businesses. But understanding the availability of credit can be challenging given the increasing number and type of credit providers, the legacy of disparate lending outcomes, and the current absence of small business lending data. Having more transparent small business lending data could aid lenders and others in the small business ecosystem to develop new products and services that support more inclusive lending for all segments of small business—whether located in rural areas or urban centers, whether employing 10 people or hundreds. This makes Section 1071 data potentially significant for all those seeking to serve the interests of small businesses.
The views expressed in this report are those of the author(s) and are not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System.