Data illuminate discrimination and inequity. As Justice Louis B. Brandeis famously wrote about another issue involving public disclosure of data,
“Sunlight is… the best of disinfectants.”
Right now, Republicans are on a mission to slash financial regulation, and financial data collection is on the chopping block. Several bills making their way through the House and Senate would reduce the amount of data that banks and other financial institutions need to publicly report – depriving all of us of critical information we need to make sure the banking industry treats communities of color fairly.
Republicans’ proposal to repeal Section 1071, upcoming small business lending data requirements, would particularly harm communities of color and the success of our economy more generally.
CLICK TO TWEET: To boost our economy, we must have race, ethnicity, & gender data of small-biz loan applicants, says @greenlining
Section 1071 is an obscure but incredibly important provision of the Dodd-Frank Act – the financial reform law passed after the 2008 meltdown — that would require financial institutions to collect data on small business loan applications, including the race, ethnicity, and gender of the owner of the business. Financial institutions would have to report the data to the Consumer Financial Protection Bureau, which would filter the data to address privacy concerns and then make it available to the public.
Although Congress passed the Dodd-Frank Act and gave the Consumer Financial Protection Bureau the responsibility of implementing Section 1071 exactly seven years ago (to the day!), the Bureau has not yet issued the rule that would put it into effect. Now, Congress may squash Section 1071 before the CFPB even has a chance to finish.
And that would be a massive blow to communities of color and the success of our economy more generally.
Entrepreneurship is a powerful way to shrink our ever-growing racial wealth gap. Small business ownership can provide families with financial security and an opportunity to build wealth and achieve economic self-determination. Businesses owned by people of color serve as engines of employment and economic development in their communities – they are creating jobs at a faster rate than White-owned firms and are more likely to hire locally.
Despite all the positive impacts minority-owned firms have on communities of color and the economy more generally, we know from the very little data currently available that MBEs (minority business enterprises, as they’re often called officially) – and firms owned by Latinos and Blacks specifically — are starved of the capital they need to reach their full potential.
MBEs have greater difficulty accessing loans from financial institutions compared to White-owned firms, pay higher interest when they borrow, receive smaller loans, and have their loan applications rejected more often. One academic paper calculated that Black-owned firms are more than three times as likely to have a loan application denied, and even when controlling for differences in credit-worthiness (often caused by redlining in the first place), Blacks are still twice as likely to be denied credit. On top of all of that, people of color are less likely to even apply for business loans because they fear rejection at greater rates than Whites.
These numbers are absurd, but we still don’t have enough information to do much about it. Banks are not yet required to collect the race, ethnicity and gender of small business loan applicants. We need the data that Section 1071 would provide in order to:
Enforce fair lending laws in the small business sector
Every year the Department of Justice and CFPB fine financial institutions millions of dollars for intentionally discriminating against people of color in home and consumer lending. Many researchers have shown that banks also discriminate against minority small business owners. Sadly, government agencies do not have enough information to effectively enforce fair lending laws on the small business lending sector. Congress created the Home Mortgage Disclosure act in 1975 to ensure communities of color were not intentionally denied home loans, and we must do the same for small business loans. Right now, regulators essentially let redlining practices against MBEs slide. This is simply unacceptable.
Identify the credit needs of our communities
Comprehensive data would show the types of businesses that don’t get capital and where they are located, helping organizations like Greenlining to effectively advocate for MBEs. Armed with comprehensive data, we could provide recommendations and put pressure on the right banks in the right places to more effectively increase safe and affordable lending to MBEs. Right now, we and others must rely on incomplete datasets and anecdotal information to inform our efforts.
Understand basic trends in small business lending to MBEs
Did you know that in 2015, half of all home mortgage loans were originated by nonbank lenders? That means the majority of home loans DID NOT come from banks you would think – your Wells Fargos, Bank of Americas, etc. Instead they came from online lenders and independent mortgage companies. This really significant trend means government agencies will have to create new regulations or adjust old ones for these technology firms, and advocacy groups like ours must focus our attention on these players.
Sadly, we have no idea to what extent this is happening in the small business world. We hear all the time of MBEs going to online lenders for fast loans only to get caught in debt traps because of high interest rates or predatory practices. Regulators and advocates need to understand these trends, and even mainstream financial institutions need the data to understand how they can create products and services to better meet the needs of MBEs.
We need your help
Data matters, especially for communities of color, because it sheds light on the abusive practices and negligence of a financial industry that has over and over again done them wrong. A rule like Section 1071 should have been implemented long ago. Let’s make sure Congress doesn’t delay this rule any longer. Call your senators and representatives and tell them to oppose any bill that repeals Section 1071. Data is the first step to getting MBEs the capital they need to thrive.
To reach your members of Congress, call the U.S. Capitol Switchboard at (202) 224-3121.