Gov't to start looking for bias in small business lending

By AP News

Banks will need to start reporting the demographics and income of small business loan applicants under new rules published by the Consumer Financial Protection Bureau on Thursday

Small Business Lending

NEW YORK (AP) — Banks will need to start reporting the demographics and income of small business loan applicants under new rules published by the Consumer Financial Protection Bureau on Thursday.

It's a move that policymakers hope will lead to less discrimination and more transparency in the small business lending market, similar to how other laws have regulated the residential mortgage market for decades.

Under the Dodd-Frank Act, Congress mandated the bureau to start collecting data on small business lending decisions to look for patterns of discrimination. Implementation of the rule has taken more than a decade, and the bureau was sued by the California Reinvestment Coalition for its failure to start collecting this data.

Bank regulators have for decades collected data on residential mortgage applicants — including race, geography, whether the loan was approved and the interest rate — under a 1970s era law known as the Home Mortgage Disclosure Act. The data collected under HMDA has long been used by regulators and the public to look for potential signs of banks discriminating against borrowers, also known as redlining.

The size of the small business lending market is roughly $1.4 trillion, according to the CFPB. But there’s not much data on how banks and non-banks decide who to approve or deny for loans, and there’s no way of seeing — outside anecdotal reports — whether banks have discriminated against black and Latino small businesses.

“The impact of the rule will be in the comprehensive data that it produces, which can be used by lenders, borrowers, and the broader public to achieve better credit outcomes for small businesses and communities across the country,” said Rohit Chopra, director of the bureau, in a prepared statement.

Small business create roughly 60% of new jobs in the U.S., and the U.S. government puts billions of dollars of resources into supporting the creation of new businesses. During the pandemic, Congress gave $800 billion to small business through the Paycheck Protection Program to keep them operating.

While the bureau has issued its final rule on this issue, it make take a few years for the public to get access to the data. Banks will have to implement systems internally to start collecting the data, regulators will need systems to ingest it, and there will be a waiting period before the data is released.

Banks that originate at least 2,500 small business loans annually must start collecting the data in October 2024, with smaller banks having to collect the data in 2025 and 2026 depending on their size.

IMPORTANT NOTICE AND DISCLAIMER

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Originally published by Associated Press Valuethemarkets.com, Digitonic Ltd (and our owners, directors, officers, managers, employees, affiliates, agents and assigns) are not responsible for the content or accuracy of this article. The information included in this article is based solely on information provided by the company or companies mentioned above.

Sign up for Investing Intel Newsletter